We are told the problem with trading credit derivatives over-the-counter is lack of transparency. Investors don't know how much risk the banks have on their balance sheet.

We read that no one really knows how much of these toxic assets have been bought by banks because they are not disclosed. They are not required to be disclosed because they are not regulated. A different solution to taxpayers footing the bill would be to ask the banks to keep the trades invisible but sell their invisibility to investors. Good information makes money so create a market.

The banks will make this invisible 'inside-info' visible to those investors who are willing to buy it in order to avoid betting their money on the wrong horse and lose more. But by selling the info to investors banks make money which reduces their losses so that other investors get interested in investing in them again.

Just because the logic is simple it doesn't mean it's not ingenius. If you don't think so, ask yourself why is it any more ingenius to have the taxpayer pay and not an investor pay to buy a good asset (a.k.a inside info on the losses).

The invisible hand of the market can recycle money as it knows best by turning the invisibility of risk exposure into a precious asset up for sale.

	Posted on:	Wed 17 Jun 2009 at 2:46:59
	Category:	Smart Investing
	Tags:	recycle, money, banks, balance, toxic, sheet, asset
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