“New products, by definition, carry more risk,” she said. The models should penalize investments that are complex, hard to understand and infrequently traded, she said. They didn’t.
“One of the things that has caused great pain is complex products,” Ms. Rahl said.
That made me think back to some of the great trading debacles of the last century, such as the collapse of Askin Capital Management, a hedge fund that fell apart because of complex mortgage security investments gone bad. Wasn’t the moral of those stories that you shouldn’t put your money (or your client’s money) in something you didn’t understand? Furthermore, even if you are convinced you do understand it, you’re not going to be able to sell it when you need the money if no one else does.
This is an unheeded moral from last century's failures.
But just how does the "free market" come up with untradeable products?