Understanding and Governing Complex Financial Instruments: A 'Social Studies of Finance' Investigation of Multi-Name Credit Derivatives

The single most important finding from this project concerns precisely what degree of complexity in financial instruments proved especially dangerous in relation to the financial crisis. We investigated ABSs (asset-backed securities), CDOs (collateralised debt obligations) and ABS CDOs (collateralised debt obligations in which the underlying assets are ABSs). All of these are complex instruments, but we found that market participants were able, with the help of technical systems such as the cash-flow modelling tool Intex, to achieve a reasonable cognitive grasp of ABSs and CDOs. However, the additional complexity of ABS CDOs defeated this kind of approach, with nearly all market participants therefore reliant primarily on the ratings of these products and on the simple models of them developed by the rating agencies (in which the underlying ABS tranches were treated in effect as if they were corporate bonds).