The letters (July 27) on our July 20 op-ed on the complexity and pricing difficulty of toxic assets raise practical issues. Much of the information about the underlying individual mortgage loans is possessed by the trustee of each original mortgage pool, and some of it is collected by a number of private firms for sale to investors. The first step is to assemble as much as possible in a central database with much broader coverage.
As one goes up the chain to collateralized mortgage obligations and to CDO and CDO-squared, and all their tranches, the complexity increases and data availability is much more limited. But the technological capacity already exists to put it together, if access is obtained and the cost is paid. It would have made sense for the Treasury and Fed to have embarked on such a project a year and a half ago.
We also recommended reforms to improve transparency and revive a viable private securitization market. Securitization of sound mortgages provides funds for the housing market that add greatly to what is available from banks alone. It is doubtful that securitization going forward will comprise so many stages, but that will be determined as the market weighs the costs and risks of complexity against the gains from diversification.
Ken Scott and John Taylor
Stanford, Calif.
