What Free Market?

So I just got done reading Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe, which I’d highly recommend if you’d like to get a better sense of how we got to where we are with the economy. There are a ton of quotes I’ll probably share over the coming days (I love that Kindle just sticks them online for you), but I found the following paragraph especially striking. As background, at one point, about a year or two ago I believe, there was a chance that a huge number of CDOs would be dropped on the market at the same time, finally giving people a “true” price.

That threat sent shock waves through the market. Nobody had ever tried to sell that many CDOs or mortgage bonds in public before. A fire sale of that kind threatened to produce something the CDO world had never seen before: “true,” undeniable market prices. In theory, that promised to be a very healthy, long-term development. After all, the bankers who had invented structured finance had always claimed to be upholding the virtues of free markets and rational pricing. They were supposed to like transparency. In actuality, though, the prospect of an open auction had terrifying short-term implications. Even at the best of times, forced sales hardly achieve good prices, and by mid-June, conditions in the mortgage market were getting worse by the day.

It’s just amazing. Those that espouse the values of free markets were doing their best to ensure that CDOs were anything but that.

October 6, 2009