…and here’s the proof. A team of computer scientists and economists have shown that a malevolent seller can bury lemon mortgages in a CDO and its impossible (i.e. computationally intractable) to discover that this has occurred, even in very simple models, and even if the buyer knows almost all of the relevant information.
I admit, I know next to nothing about CDOs, what they’re used for, why they’re beneficial, so starting this thread was mostly for my own educational purposes. However, a few people (see here for instance) aren’t fans, and are calling for them to be banned. What would be the result of banning CDOs? Are they a fundamental to the well being of the economy? Does the above cited paper change anybody’s mind?