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Strong opinions, weakly held

The financial crisis in a nutshell

When you nail it, you nail it. Commenter Chris from Felix Salmon’s blog explained the financial crisis in two sentences:

The person most willing to take on risk is the one unaware he is doing so. He charges no risk premium…

The resulting market equilibrium is that the guy who is unaware of the risk ends up loaded with it. Then the music stops.

Investment banks took risky investments and manipulated them until they looked like safe investments, then sold those “safe” investments to people who didn’t know better. Cynics could argue that this is the only purpose that securitization and derivatives serve.

1 Comment

  1. In other words, if you don’t know who the sucker is …

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