Credit market has pros confused
A new survey of 258 leading business analysts - ranging from those with doctorates in economics to MBAs and supply chain specialists - indicates that many of these sophisticated professionals are unfamiliar with the complex credit instruments at the heart of the recent market turmoil.
The National Association for Business Economics survey, released Monday, found that 51 percent of those responding had little or no familiarity with the "structure, activities and risks" associated with collateralized debt obligations or CDOs.
CDOs are securities backed by pools of bonds, loans or other assets that are sliced into tranches with varying maturity dates and differing degrees of risk.
A smaller 45 percent didn't have a good grasp of hedge funds - investment vehicles that are privately run, overseen by investment managers, and not widely available to the public. They use a wide array of investment strategies.
And 68 percent didn't have a handle on credit default swaps - which investment giant Pimco explains in a bond basics primer as: "In its most basic terms, a credit default swap is similar to an insurance contract, providing the buyer with protection against specific risks."
"There was a joke going around: 'What do you get when you cross a CDO salesman with a Mafia don? You get an offer that you don't understand,' " says Carl Tannenbaum, NABE president and chief economist at LaSalle Bank/ABN-AMRO in Chicago.
Just because they are complicated, doesn't mean that the innovations in finance are bad. But financial firms need to do a better job of explaining them, he says.
The survey ran July 24-Aug. 14, though most were completed by Aug. 4, ahead of much of the market gyration. Still, they show that even before the bottom fell out of the credit markets, concerns were mounting. More than 29 percent of the economists call the recent housing boom a "serious national bubble," up from 14 percent in August 2005.
Further, 64 percent now call "easier credit standards" the No. 1 or No. 2 reason for the housing surge, up from 34 percent in 2005.
The majority of NABE members said recent, tighter federal mortgage rules - such as making sure borrowers can repay adjustable-rate mortgages at the higher, reset level, not just an initial teaser rate _ are appropriate. But 90 percent termed them "a little late."
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