Voltron's economics blog. Started in Iraq in 2007 as the "Gamblers Anonymous Support Group" email list.
Thursday, December 24, 2009
Goldman, Deutsche, and the Destructive Use of Synthetic CDOs Come Into Focus
Voltron says: A Collateralized Debt Obligation (CDO) is a bundle of mortgages that is sliced up and sold. The problem was that demand for CDOs exceeded the number of mortgages, after all, the "boom" in home ownership was only a few percentage points. In order to satisfy demand without having to go through the trouble of actually selling real mortgages, dealers created a derivative called "synthetic CDOs" where the cashflows of a CDO were mimiced by using Credit Default Swaps. The problem is that the sellers of the Credit Default Swaps were often the dealers themselves, so they would benefit from mortgages going bad. Yves Smith at Calculated Risk spins a more sinister plot, claiming that Synthetic CDOs were created specifically by dealers to short the housing market. She weaves together a New York Times article and the book "The Greatest Trade"
The point is just how gigantic this fraudulent derivatives house of cards has become.
Note: Does not include Medicare, Medicaid or Social Security.
This is not an offer to buy or sell securities in any jurisdiction. This blog is for informational purposes only. I do not give legal, tax or accounting advice of any kind. I am not a licensed financial advisor. I make no representations as to the suitability of any transaction at any time. In fact, you should ignore everything I say.
Voltron's Current Forecast
Wall Street and the government are about to engage in battle and recriminations in the face of a massive wave of foreclosures. Wall Street will start yanking the leash, causing stock market crashes whenever the status quo is threatened.
The Fed's announcement that they are going to print a Trillion dollars and use it to buy debt is the proverbial "crossing of the Rubicon" The US Dollar is toast. I think the trigger will be some of the smaller holders of Treasurys (Singapore, for example) trying to dump their holdings before China does. This will cause a panic stampede out of Treasurys which will destroy the dollar.
Wells Fargo are liars. They have over 150 Billion in worthless home equity loans and a Trillion dollars in off-balance sheet liabilities.
Do not abuse leverage. The Fed is going to spend limitless amounts of money to pound interest rates and Gold prices into appearing "normal" when in fact they are on the verge of exploding. The tremendous volatility will shake out leveraged players.