A CDO manager finds himself living in Chapter 12 of Keynes' General Theory

The more I read about the sub-prime mortgage thing, the less I know.

I mean, this has been going on for a couple of months. Even with all the complexities created by traches and CDOs and the rest of the weirdness represented by financial jargon, by now people should have figured out what the risk/benefit ratio of their investments really are, and acted accordingly. The winners and losers should have been decided already.....so why is this still going on?

And including an extensive quote from Keynes (who may have been a genius when it comes to economic theory, but apparently couldn't handle construction of comprehensible sentences in the English language) doesn't really help.

I don't think people have any idea yet what the risk/benefit ratio of many mortgage securities are. And they won't until the next couple of years play out and we see how many borrowers actually end up defaulting. We could possibly speed it up by creating some sort of government-backed clearinghouse to buy CDOs and make a market in them (like the RTC in S&L days). But I personally can't do that, so I think I'll just keep quoting Keynes. I will look for some passages with shorter sentences, though.

Here is a breakdown of what Keynes is saying:

[Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes.]

Translation: No one can accurately predict the future in investing all of the time.

[There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; — human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate.]

Translation: A sure investment gives low returns. People want to get rich quick. You can only get rich quick from risky investments.

[The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.]

Translation: Low risk investing is boring. Investors are gamblers. Sometimes you win, sometimes you lose.

[Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money — a further reason for the higher return from the pastime to a given stock of intelligence and resources.]

Translation: You have to diversify your investments so you will not go broke, especially if you are using someone else's cash.

[Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.]

Translation: The big moneyman will get all of the praise and glory when things go right. The big moneyman will be the scourge of the Earth when things hit rock bottom. It is better to lose a little here and there than it is to win big and lose it all quickly.