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Back to Einhorn

August 18, 2008 – Comments (1) | RELATED TICKERS: ALD

Somebody that I pay a lot of attention to and look up too a lot is David Einhorn. He made a speech last october that still sticks out me. I decided to repost it. He hits the nail right on the head with this one..

"What strikes me the most about the recent credit market crisis is how fast the world is 
trying to go back to business as usual. In my view, the crisis wasn’t an accident. We didn’t 
get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad 
ideas. Securitization is a mediocre idea. Re-securitization of already securitized assets into a 
CDO is a bad idea. Re-securitization of CDOs into CDO-squared is a really bad idea. So is 
funding a pool of long-term illiquid assets with very short-term funding in the so called asset 
backed commercial paper market. And as I will get to in a moment, it is a horrendous idea to 
delegate most of the responsibility for assessing credit risk to a group of credit rating 
agencies, paid for by the issuers rather than the buyers of bonds. 
This crisis came for exactly the right reason. There is a big flaw in the structure of our 
credit markets. The bad structure induced lenders to take imprudent risks and make 
imprudent loans, which, of course led to losses. What is unique about this crisis compared to 
others is that the losses are in illiquid, opaque structures scattered around the world. Why 
should anyone be surprised? We got what we deserved."