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In principle, an alert buyer can detect tampering even if he doesn't know which asset classes are the lemons: he simply examines all 1000 CDOs and looks for a suspicious overrepresentation of some of the asset classes in some of the CDOs. What Arora et al. show is that is an NP-complete problem ("densest subgraph"). This problem is believed to be computationally intractable; thus, even the most alert buyer can't have enough computational power to do the analysis.

Arora et al. show it's even worse than that: even after the buyer has lost a lot of money (because enough mortgages defaulted to devalue his "senior tranche"), he can't prove that that tampering occurred: he can't prove that the distribution of lemons wasn't random. This makes it hard to get recourse in court; it also makes it hard to regulate CDOs.

Everyone on Wall Street... UP AGAINST THE WALL, THE LOT OF YOU BASTARDS!

Derivatives are extremely complicated.

They are so complicated that very few people even pretend to understand them. This is why the derivative specialists at all the failed financial and investment houses still have jobs, still are recruited, and still are eating caviar and drinking Cabernet.

Thank you Phil Gramm (R-stupidass-Texas) for making it legal to hide how derivatives are constructed from investors and regulators.