THE TOXIC ASSETS ARE STILL HERE. I have posted several times, including here, on the need to deal with toxic assets. Professors Kenneth Scott and John Taylor had an article in yesterday’s Wall Street Journal on just how complex these these assets are and on the fact that they remain “a serious impediment to economic recovery.” Their article describes just how complex these assets are. They begin by describing how pools of thousands of mortgages were “sliced into a hierarchy of “tranches” that were sold to investors as separate classes of securities.” But then those securities—the “tranches”—were often put into pools and slices of these pools were sold (call these new securities “second round securities”—Scott and Taylor have the actual acronyms. They take a hypothetical second round security based on 100 second round securities which in turn were based on tranches of pools of 250 mortgages. You would need information on 2500 mortgages to value the security. Taking the process to a third level and assuming the initial pools had “a mere 2000 mortgages” and you would need to evaluate 20 million mortgages! You can see how daunting the problem is, and as yet very little has been done to deal with it.

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