It's not the derivatives, it's the loans, says Felix Salmon:
Finance Blog - Market Movers by Felix Salmon: I'm sure it's been happening a lot in idle conversation, but it's still disheartening to see it happening in on the front page of a WSJ section: confusing illiquidity problems in the subprime market with more theoretical worries about derivatives.... Scott Patterson... should know better, in his Ahead of the Tape column....
There is no indication whatsoever here that Patterson understands that the illiquid securities which are causing so much trouble in the "subprime-mortgage crackup" aren't derivatives.... CDOs are securities – not derivatives – which are very, very rarely traded. As a result, they're often "marked to model" rather than being marked to market. That seems to be the problem that Patterson's column is concerned about, and it's silly for him to be complaining about derivatives in this regard.
It's true that the troubled Bear Stearns funds did invest in some derivatives – mainly bets on the direction of the ABX.HE index of subprime bonds. Those investments rose and fell in value very transparently, and were by far the easiest part of the Bear portfolio to unwind. So let's not start blaming illiquid derivatives for Bear Stearns' problems. Right now, illiquid derivatives are the least of anybody's problems.