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.

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