[S]ecuritisation has produced a particularly curious – or absurd – paradox. A few years ago, it was widely assumed that the process of slicing and dicing credit would create a more “complete”, free-market financial system. But by 2005, credit products had become so complex and bespoke, that most never traded at all. Thus they had to be valued according to models, since they could not even be priced in a market – in a supposed free-market system.This makes no sense at all. Apparently Tett thinks that a financial instrument can't be efficient unless it's frequently traded. Huh? Lots of corporate bonds are very thinly traded, but that has nothing to do with whether corporate bonds are efficient financial instruments. This isn't even a coherent argument.
Tett also thinks that bespoke credit products are inherently inconsistent with a "free-market financial system." Why? Because they can't be easily marked-to-market. Umm, of course bespoke credit products can't be easily marked-to-market—they're bespoke. (Believe it or not, there aren't a lot of investment firms that are interested in buying a credit product that was custom-made for a different firm.) The simple fact is that free-market financial systems have bespoke credit products—after all, every financial product that's sufficiently standardized to be heavily traded started out as a bespoke product. And how bespoke credit products are valued for accounting purposes has absolutely nothing to do with whether they make financial markets more complete.
It's strange that Tett has a reputation for being an expert on structured credit markets when she so frequently makes these kinds of basic errors in discussing structured credit. (Errors like claiming that JP Morgan created credit derivatives in 1997, even though every single bank on the Street had a credit derivatives department by at least 1994.)
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