Financial shell games
As the markets wait for the first round of subprime effects to shake out, Satyajit Das takes a wry look at the fundamental issue of risk transfer
The shell game is a notorious confidence trick involving three shells and a small ball, about the size of a pea. The ball is placed under one of the shells, which are then quickly shuffled around. Bets are taken from the audience on the location of the pea. Through sleight of hand, the operator easily hides the ball, undetected by the victims. Risk transfer - the concept on which modern financial markets are based - is the shell game of the credit markets.
Financial regulators believe that if
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