And back to financial armageddon

This is a chart of ABK. Exactly nine months ago I began nibbling shorts into this baby and its subsquent death spiral was spectacular. Sweet (and painful short squeezes) memories when I did my taxes this morning.

I took some excerpt from Warren Buffett discussions of the bond insurers, very concise and straightforward:

" I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000.

If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean, it can't be done. When you start buying tranches of other instruments, nobody knows what the hell they're doing.

It's ridiculous.

And of course, you took a lower tranche of a mortgage-backed security and did 100 of those and thought you were diversifying risk. Hell, they're all subject to the same thing. I mean, it may be a little different whether they're in California or Nebraska, but the idea that this is uncorrelated risk and therefore you can take the CDO and call the top 50% of it super-senior - it isn't super-senior or anything.

It's a bunch of juniors all put together. And the juniors all correlate. "

Amen.