Confirmation of the subprime crisis

Gary Gorton’s Panic of 2007 was a fairly interesting read only because it confirms most of my biases about the subprime crisis so yes, this post is confirmation bias at its worst.

• The lack of a way to short the crisis did not allow asset prices to adjust.
• The introduction of the ABX index allowed shorts to finally reveal their expectations and beliefs.
• The size of the the trade on short side of the ABX revealed to the market the expectations which set the market into a downward spiral.
• The ABX index made it easier to mark MBS to market which fed back into the downward spiral.

Most surprising passage (in other words investors bought stuff they had no idea how to value):