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The last bit troubles Felix Salmon, who seems to think that makes CFOs life difficult.  Perhaps, but should we care?  In particular, there clearly is some tension between this proposal and traditional risk management.  But at present, originators can use CDS to give themselves a zero or even negative stake in the outcome of the securitization.  In such a world -- and that's the world we'll return to if we simply restart the securitization market without change -- the downward spiral of asset quality I described in my prior post in essentially unstoppable.

Sure investors will be "smart" now, and they won't buy low quality assets with the same mania, but individual investor moderation does only little to address the systemic issues that come from excessive securitization.  Only an unhedged originator stake can correctly align incentives.  I doubt 5% is a sufficiently large stake; but it's a start, indeed any number greater than zero is a move in the right direction.

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