Graphical explanation of CDOs
December 6, 2007 12:06 AM   Subscribe

A graphical, animated explanation of how collateralized debt obligations (CDOs) work, by Felix Salmon, Maryanne Murray, Jeffrey Cane, Jacky Myint, and Shazna Nessa. The collapse in CDO valuations and the resulting losses to investors played a major role in the recent banking crisis. Via Paul Krugman.
posted by russilwvong (42 comments total) 5 users marked this as a favorite
 
"recent" banking crisis? Who told you it's over?
yeah, nitpicky, sorry
posted by wendell at 12:35 AM on December 6, 2007


It's over because Bush is going to freeze interest rates for 5 years (just in time for the 2012 elections), right? Right?!?
posted by PenDevil at 1:27 AM on December 6, 2007


It will really suck if CDO's break the banking system globally. As in great depression suckage.
The important folk at the central banks are very quiet about it, not wanting a Northern Rock style run on the banks, but the breakdown in risk transparency has been a big, fundamental blow to the global finance system.
I'm sure Malor will be along in a moment to tell us how fiat money is to blame, but I actually think it is something else.
In the US in most states (all?) if you default on your mortgage you can walk away. Sure, you lose your house and it stinks up your credit rating, but if you are a sub-prime borrower, so what?
In most other nations if you default on the loan you still owe the cash, having to declare bankruptcy to get a clean(-ish) slate.
This puts some limit on how high people will bid up prices for houses, as defaulting will ruin you. In the US, not so much, so if you are already a marginal borrower there is no reason not to take a punt that a runaway market will keep going up.
I never thought of myself as a free market idealogue, but seeing the way distortions like this queer markets is making me one.
posted by bystander at 2:15 AM on December 6, 2007


The losses have often surprised the investors, and in some cases the funds and the executives of the banks, who were unaware of the extent of their risks.
Yeah sure, they were unaware :)
posted by elpapacito at 2:30 AM on December 6, 2007


And while the buckets analogy is rather interesting in its mechanics, it still doesn't show very well how the CDO "AAA" rated bucks were, actually, a lot more risky than AAA-rater mortgages, as it is evident that CDO's are satisfied only IF and after the more risky BAA mortgages are satisfied. Therefore, the distribution of CDO over n BAA mortgages doesn't reduce the risk level from BAA to AAA, because distribution is NOT diversification.

And nobody can sell me the idea bank executives or analysts didn't know or couldn't easily tell difference from distribution and diversification.
posted by elpapacito at 2:46 AM on December 6, 2007


I will actually stand up for the ignorance of some of the investors. If you are managing an investment fund (like my local council's, whose losses so far have mercifully been small) you accept the credit rating agency's verdict. When Moodys and S&P say it is AAA you are right to be surprised when it goes bung.
The sellers of these instruments don't get any sympathy from me, however.
My worry is the house of cards is being propped up until the end of the year so bonuses are locked in before the unraveling really begins.
The real problem is if the ratings agencies are so easily fooled it calls everything into question.
And if I can't trust investments, I'll hold my money tight, liquidity will dry up, interest rates will soar and the economy will decline.
The hurt starts with a business that can't get a loan to by a new press at a reasonable rate, so it doesn't bid as low as it could have, so it's customer has to pay more, so the customers employees can't get their raise, and the customer's customers - eventually us - end up paying more (or we don't buy).
So starts inflation or a recession. Either are bad, and depending on where you sit one is worse.
If you are a retiree living off investments, inflation kills as your $500 a week buys less in inflation.
If you are a working stiff a recession hurts more as you don't get a pay rise or you lose your job.
posted by bystander at 2:47 AM on December 6, 2007 [1 favorite]


elpapacito, the buckets analogy does work, as it shows the lack of distribution "drying up" the AAA rated CDOs.
So why were the CDOs rated AAA anyway is the real question. I think the answer is that historically there has always been deviation across the USA geographically. When farmers were hurting manufacturing was booming, when manufacturing hurt, services held up.
I suspect the US economy has been stretched by globalisation so the primary production and manufacturing sectors are under weight - as factories go off-shore and farming is done cheaper elsewhere - so a services recession has more impact nationwide.
All of a sudden the underpinnings of the rating assumptions, that when one area is slowing capital will flow elsewhere, is falling down as that capital flows abroad to where the manufacturing and primary production industries have relocated.
Where I live we are used to this booming and busting because we don't have the wide distribution of economic activity the US has previously enjoyed (although it still hurts) but this is a bit of a wake up for a lot of America.
posted by bystander at 2:58 AM on December 6, 2007


The problem of AAA securities being impaired in the "not getting your money back at the end" sense is small relative to the problem of "how much is our AAA tranche worth right now if I wanted to sell it?". The prices of AAA tranches in the secondary market (and in particular in the indexes for derivatives tracking the securities) have made no sense recently. Prices have below those which the fundamental cash-flows would give you -- e.g. prices of 70% would need no prepayments on any loans in pool coupled with every single one of them to default, with a recovery rate no greater than 50 per cent. Which is a remote scenario. One of the problems in the specific sub-prime RMBA/CDO area is that the valuation models have broken down and people aren't yet in a position to do the individual loan level due diligence required to sort good from bad. The fact that not-stupid cash-rich hedge funds are buying these securities shows that there is value out there...
posted by patricio at 4:32 AM on December 6, 2007


I'm sure Malor will be along in a moment to tell us how fiat money is to blame, but I actually think it is something else.

Well, I tend to suspect that a smaller version of the same problem would have happened on commodity money, but we would have caught the problems many years ago and fixed them.

Being able to paper over any kind of problem at will means that problems don't get solved.

Fiat money probably could be as reliable as a gold standard, in the proper hands, but proper hands don't seem to have ever existed. Volcker in the 1980s was pretty good, but the pressure on central bankers to 'fix the problem now' is immense, and only the deep pain of the powerful inflation of the 1970s (an era of recovery from the monetary disorder of the late 60s) gave him the political capital to run a properly tight ship.

The real job of central bankers is to take away the punchbowl anytime a party gets started... but our current central bank regime has, instead, been spiking it for many years.

I do believe, and have said so many times, that fictional money is at the core of the problem, because if you have a fictional foundation, you can build any fictional structure you want on top of it. For awhile. With no connection to reality, there's no signal to the economy to adjust to changing times if the politicians don't want there to be one. We haven't had a significant recession in 25 years. We're going to go through all that accumulated pain and adjustment, but now we're going to do it all at once, instead of slowly over time. Instead of bending, we're going to break.

Derivatives in general are a gigantic problem. Warren Buffett has called them financial weapons of mass destruction. He wasn't kidding. I tend to go back a step to look at root causes, because I've been looking at the derivative mess for such a long time, but there's lots to know and be fascinated/appalled by without even getting into the fiat/commodity money question.
posted by Malor at 4:39 AM on December 6, 2007


Basically: part of capitalism is the destruction of obsolete business models. That's what recessions do; they teach the economy to gain strength, as waste is reduced and efficiency is improved.

The 'creative destruction' part of capitalism is terribly important, but for the last generation, our central bankers have decreed that there will be as little as possible. Recessions Are Bad in their view, and they've done everything in their power to prevent them.

This is very much like the Forest Service's one-time focus on preventing all forest fires, because 'fires are bad'. The Fed has aggressively attacked even small economic fires, so the entire system is choked with underbrush. Just like with real forests, when we DO finally have the inevitable fire we can't control, it'll be many times worse than it should be, burning even the biggest and oldest of the economic trees. We'll lose institutions that would have survived the ordinary recession brush fires without a problem.
posted by Malor at 4:50 AM on December 6, 2007 [3 favorites]


(and if I wasn't clear enough: CDOs are wide swaths of mesquite, which would have gone up in flames long ago if we had any kind of a normal economic cycle.)
posted by Malor at 4:51 AM on December 6, 2007


In the US in most states (all?) if you default on your mortgage you can walk away. Sure, you lose your house and it stinks up your credit rating, but if you are a sub-prime borrower, so what?
In most other nations if you default on the loan you still owe the cash, having to declare bankruptcy to get a clean(-ish) slate.
This puts some limit on how high people will bid up prices for houses, as defaulting will ruin you. In the US, not so much, so if you are already a marginal borrower there is no reason not to take a punt that a runaway market will keep going up.


I don't understand this. Granted, I've never been through the process of buying a house, but part of it has to be lining up the original house loan. If you have a successful bid but can't secure the loan, doesn't the house go back on the market? That means that securing the loan would be an effective check on the purchase price, because anyone who bids higher than they can actually afford would simply not be able to arrange a loan that large, right?

When customers are able to give up the collateral on the loan and 'walk away', that puts the burden of responsibility on the loan originators... except that most loan originators want to sell loans to customers, package and sell the risk upwards, and collect origination fees. The purchasers of the risk never do any sort of diligence to find out what exactly they bought except to check the rating. Money's flying around, middlemen are collecting fees, and no one's following any basic banking rules.

Is the market queer? Yes. But would placing the risk on customers be the right way to fix it? I do not believe so. If you're a large fund who enters a market containing a lot of risk and you refuse to find out how much risk you're in... then that's your goddamn fault when your fund goes tits up.
posted by suckerpunch at 5:57 AM on December 6, 2007


(The funny thing here is that a large enough fund or bank will never go down. Anything sufficiently large will cause massive strain on the economy, which means that someone will be along shorlty to bail them out. It's the principle of debtor's leverage.)
posted by suckerpunch at 6:04 AM on December 6, 2007


If you have a successful bid but can't secure the loan, doesn't the house go back on the market? That means that securing the loan would be an effective check on the purchase price, because anyone who bids higher than they can actually afford would simply not be able to arrange a loan that large, right?

Logically, but generally the ones who gave the loans would simply sell them off immediately at a profit. There was zero incentive for them not to give them loan. If they didn't give it, some joint down the street would and realize the profit. There's supposed to be a number of checks on this system, but they all broke down:
  • Honest home appraisals would have stopped million-dollar shacks from happening, but any appraiser who worked honestly found himself out of business quickly as the loan officers would skip to the ones known to toe the bubbly line.
  • Honest investment ratings (AAA? Sha, right.) would have stopped the demand for these loans, but the ratings houses realized the same things that the appraisers did and stepped into line quickly.

  • posted by unixrat at 6:19 AM on December 6, 2007


    The animation left out the part where the consumers will be expected to pay for the manager's mistakes and poor judgment.
    posted by Thorzdad at 6:32 AM on December 6, 2007


    The funny thing here is that a large enough fund or bank will never go down.

    That's not necessarily true, suckerpunch. Past a certain point, 'too big to fail' turns into 'too big to save'. I think we're well past that point with many of these multinational conglomerates.
    posted by Malor at 7:41 AM on December 6, 2007


    This is very much like the Forest Service's one-time focus on preventing all forest fires, because 'fires are bad'. The Fed has aggressively attacked even small economic fires, so the entire system is choked with underbrush.

    I fear that this analogy is terribly accurate.

    the problem of "how much is our AAA tranche worth right now if I wanted to sell it?"

    Which is indeed a problem since the accouting for these securities is mark-to-market, i.e., they are supposed to be valued at the price the market sets for them (as opposed to a price determined by some omniscient nerd running the numbers and actually figuring out - statistically, at least - how many of the underlying borrowers will default and how many will pay).
    posted by taliaferro at 7:43 AM on December 6, 2007


    The Fed has aggressively attacked even small economic fires

    It should be noted that there was a tech bubble, and it did burst. That burned through some of the underbrush, don't you think?
    posted by taliaferro at 7:51 AM on December 6, 2007


    Not to derail, but this thread is why I love Metafilter. Insightful commentary from people that actually know what they are talking about.
    posted by cmicali at 7:53 AM on December 6, 2007


    Yeah sure, they were unaware :)
    posted by elpapacito at 5:30 AM on December 6


    I think they were, because (a) most of those CEOs are managers/lawyers, not traders, and (b) it was certainly a surprise to the CEOs of Merril Lynch and Citibank who were very clearly fired.

    Which is indeed a problem since the accouting for these securities is mark-to-market, i.e., they are supposed to be valued at the price the market sets for them (as opposed to a price determined by some omniscient nerd running the numbers and actually figuring out - statistically, at least - how many of the underlying borrowers will default and how many will pay).
    posted by taliaferro at 10:43 AM on December 6


    And yet, they are very slowly getting priced. Granted the prices are horrible, but a problem of known magnitude is considerably better than a problem of unknown magnitude. This problem is working itself out.

    The fact that this problem has now trickled down to colorful flash animations on general interest personal finance sites tells me the actual problem (the CDO problem, not the housing mess) is far closer to being fully contained and compartmentalized from the rest of the market.

    Consider that when this problem blew up in August, the market was in free fall until the Fed took emergency action to cut rates. This time around, the market appears to have put in a bottom on news of M/A activity and an influx of new capital (see Citadel's bailout of Etrade and Dubai Inc., several billion $ infusion into Citicorp). And thed fed hasn;t even done anything yet. In fact, I wonder if the Fed's move on Tuesday is the denouement of this correction, after which the market returns to it's previously scheduled go-go google rally.
    posted by Pastabagel at 7:56 AM on December 6, 2007


    Yeah, some, but it should have been a really huge fire.... the Fed reacted with giant hoses of liquidity to try to extinguish as much as possible. The Y2K crash should have caused a legendary downturn. But by prescribing more of the same stuff that made us sick, they put off the day of reckoning a good seven or eight years... and made the final outcome far, far worse.

    To prevent the damage from a huge bubble, the Nasdaq, they blew up two more bubbles that are immense beyond all imagination, debt and real estate. And they didn't even really prevent the original damage, they just delayed it, and perhaps spread it to other countries who have taken up large holdings of dollars.
    posted by Malor at 8:01 AM on December 6, 2007


    is far closer to being fully contained and compartmentalized from the rest of the market.

    There ain't no such thing in the era of derivatives.
    posted by Malor at 8:02 AM on December 6, 2007


    This is a summary of a new financial product that the wizards on Wall Street have come up with; it was forwarded to me by a friend:

    Investment Dealers are excited to announce the newest structured finance product - Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees, or COLOSTOMY BAGS. Designed to accommodate the most sophisticated investment strategies, Colostomy Bags contain the equity tranches of Structured High Interest Taxable Derivatives, or SHIT, and are leveraged an infinite amount of times through the innovative use of derivatives.

    "Its an actively managed, unlimited liability, open ended investment with no maturity date, which pays LIBOR plus 5,000 and has no correlation to traditional investments" said a spokesman for the Investment Dealer who engineered the product. "It's based on a CDO structure, but it's designed to default BEFORE the first coupon payment, which you'll agree has no correlation with stodgy traditional investments and is a perfect fit for portable alpha scams, er, strategies." Following the default, each month more leverage is added to the structure to pay for the coupon and the Dealer's fees which are set at 80%.
    "We feel the fees are reasonable, given the adrenaline rush you'll get each month attempting to mark these."

    The Colostomy Bags carry a AAAA rating, based on the rating agencies opinion that they are even safer than Treasuries. "You can't use traditional credit analysis to value these babies, no sir-ree" said a spokesman for a rating agency. "Just like Icelandic Banks, we give them the highest rating because you just know that the Fed will bail out all the hedgies who buy these things..remember like Long Term Capital? And the best part is, the beauty of this structure is that the loss given default is NEGATIVE, so by extension we feel that the CDS will trade through Treasuries."

    Inhaling deeply on a fatty, he continued "We've been tinkering with our model, which served us well for Enron and the Telecoms in '02, and our stress testing shows that the probability of loss in the senior tranche is close to zero."
    The model, constructed of a wishing well, Joseph Jett's trading blotter, and drawings of Unicorns then collapsed in a heap. "Well, back to the drawing board!" he cackled.

    A real money investor, huddled on the windowsill outside his office, said he remained optimistic about holding the Colostomy Bags but was a bit concerned with the 95% decline in value on the first day they traded. "We've taken a bit of a haircut on these but I'm waiting to see the first servicer report, which should arrive in a few months. At first I was annoyed that the dealer who sold them to me refused to make a market in them, but that makes my job easier since I'm not tempted to sell."

    We located a hedge fund manager at a due diligence meeting in the VIP room at Score's. He said he was skeptical of the structure at first but was dared into buying it by a fixed income salesman. "He said to me, 'what's wrong with you, its quadruple A rated, just buy it, what are you a pussy?' He also said it was going into 'an index', although he didn't say which one, but I felt that I had to buy it. And that was good enough for me, bro'."
    posted by taliaferro at 8:05 AM on December 6, 2007 [1 favorite]


    "I think they were, because (a) most of those CEOs are managers/lawyers, not traders, and (b) it was certainly a surprise to the CEOs of Merril Lynch and Citibank who were very clearly fired."

    There's an interesting article at the FT about this, focussing on how the internal culture of Goldman Sachs meant it was more risk aware than some other banks and didn't get hit as badly.
    posted by patricio at 8:07 AM on December 6, 2007


    unixrat : yes and yes.

    I've wondered why having the world 'awash with liquidity' is a bad thing. This appears to be a case of that - previously working financial systems could not scale to work with the amount of capital out there, and checks and balances eroded as incentives changed. (This point of view, of course, argues for new structures, but only if we'll still have as much capital out there.)
    posted by suckerpunch at 8:07 AM on December 6, 2007


    it was certainly a surprise to the CEOs of Merril Lynch and Citibank who were very clearly fired.

    This is silly logic. Both of these CEOs were in the too-common situation of playing a game they couldn't lose.

    CEOs aren't paid based on the expected value of their results, but rather are paid on their actual results. Furthermore, they have large golden parachutes that provide ample income, even if everything fails. (O'Neal made $150-200m by blowing up ML. Prince made about about $100m by blowing up Citi)

    Both of them would have made even more if their gambles had continued to pay off, but it's not like there was some sort of strong disincentive present, to keep them from behaving as they did.
    posted by Tacos Are Pretty Great at 8:18 AM on December 6, 2007 [1 favorite]


    Both of them would have made even more if their gambles had continued to pay off, but it's not like there was some sort of strong disincentive present, to keep them from behaving as they did.
    posted by Tacos Are Pretty Great at 11:18 AM on December 6



    There certainly is. These people were multi-multi millionaires before this year. They aren't motivated solely by money, because they had it. People like this are motivated by something else, power, which I think in this case manifests as the desire to dominate the street, e.g. to be the next J.P. Morgan (the man, not the company).
    posted by Pastabagel at 8:35 AM on December 6, 2007


    These people were multi-multi millionaires before this year.

    They're multi-multi millionaires now.

    People like this are motivated by something else, power, which I think in this case manifests as the desire to dominate the street, e.g. to be the next J.P. Morgan (the man, not the company).

    True, but you're talking about the present incentives - the carrot. TAPG is talking about disincentives - the stick. This is what psychologists call 'risk homeostatis'. Simply put, there are no reasons why you shouldn't push everything to its limits.
    posted by suckerpunch at 9:00 AM on December 6, 2007


    I've wondered why having the world 'awash with liquidity' is a bad thing.

    Why? Because it's not wealth, it's debt. It's claims on future production of the economy underneath.

    No matter how many dollars you print, if your factories can only make a million loaves of bread a day, that's all the bread you've got. If you are 'awash in liquidity', then bread costs more currency to buy.

    If the economy runs into trouble, then all that overhanging production debt can be a real problem; there's just as many or more dollars than there were last year, but suddenly fewer factories making things. Prices, again, go up.

    Inflation always benefits the people close to the source of new money, and always hurts the people who get the new money last -- you and me.
    posted by Malor at 9:10 AM on December 6, 2007 [1 favorite]


    So why were the CDOs rated AAA anyway is the real question

    I've read that they ran monte carlo simulations on the performance, with input assumptions that RE could only go down 5%, max. Every 1% back-ratchet of the market bring billions of losses to these MBS-backed instruments. My sister's place in Riverside County (purchased in 2003 for $300K) was worth $500K in December 2005, and is now sellable for under $400K and heading south fast. Some 5%!

    GIGO, and since the bubble was nationwide, there's a lot of G in the system.
    posted by panamax at 9:22 AM on December 6, 2007


    This slideshow is a terrible explanation of what a CDO is. I guess it's accurate as far as it goes, but it doesn't explain the financial engineering behind them. Even the Wikipedia article is better.
    posted by Nelson at 9:27 AM on December 6, 2007


    there's just as many or more dollars than there were last year, but suddenly fewer factories making things. Prices, again, go up

    Japan in the 90s illustrated the Liquidity Trap is a different phenomenon. Our negative savings rate is a wondrous thing for the present economy, but should consumers start bunkering down, and only buy beans and bullets, deflation is also a possibillty, regardless of how much fiat money is injected into the system.
    posted by panamax at 9:28 AM on December 6, 2007


    Yeah, that's actually more likely, since in a recession, a lot of our debt-based money will disappear in loan defaults.

    If I lend you $50, then you HAVE $50, and I think I have about $55, because of the interest you'll pay me. So $55 has sort of been created. But if you default, suddenly I don't have my $55 anymore, which means money has 'vanished'. When debt defaults start, they can cascade, causing deflation and a desperate scramble for cash. People are willing to sell things for less than normal to get access to liquidity, so prices drop.

    I was just trying to be relatively simple in the explanation, but in doing so, I drew an unusual picture. While it is possible to have both a declining output and price increases, as we saw in the 1970s with stagflation, that's not really expected behavior.

    BTW, the scenario you refer to has been described as the central banks 'pushing on a string' -- they can't get traction. The Fed is desperately trying to avoid that, and has basically announced it will destroy the dollar to prevent that outcome.
    posted by Malor at 9:56 AM on December 6, 2007


    There certainly is. These people were multi-multi millionaires before this year. They aren't motivated solely by money, because they had it. People like this are motivated by something else, power, which I think in this case manifests as the desire to dominate the street, e.g. to be the next J.P. Morgan (the man, not the company).

    If your statement had any basis in fact, bank CEOs would not be demanding the sorts of compensation that they are, in fact, receiving.

    As for the lust for power, the surest way to increase your "power" on the street if you're already the CEO of a large bank, is to create record growth in that bank. If you just run it at a strong but conservative clip, you'll do shareholders a world of good, but you'll be outshone, especially if your peers are gambling huge and pulling down 2 or 3 times your returns.
    posted by Tacos Are Pretty Great at 10:06 AM on December 6, 2007


    From today's NYT, an article about the role of the big banks in this business. The fourth paragraph has a few statistices: "The average default rate for subprime loans packaged in 2007 is 11 percent."
    posted by taliaferro at 10:26 AM on December 6, 2007


    Let's say you are a CEO and you are sure that you're planning to retire after this job. You're aiming to work for 10 years.

    For the purposes of this example, we'll say that you are paid a bonus equivalent to 1% of company profits, and that if you get fired for any reason, you'll receive $10. The company currently makes $1000/year.

    Strategy 1: Stable expansion at around 10%/year. No significant risk.

    Assuming an 8% discount, your 10 year compensation has a value of $110.77.

    Strategy 2: Rapid expansion at around 20%/year, but with a 10% chance that you will lose your job in any given year because the company will have taken massive losses.

    There's about a 1 in 3 chance that you'll still have a job after 10 years (in which case you will look like an absolute genius) and your expected value for the pay package is $108m.

    As such, I'd expect already rich power-hungry CEOs to prefer strategy 2 over strategy 1, as their expected average reward is nearly identical, but with strategy 2 there is a far greater chance that they will be perceived as being incredibly talented.


    The $108m comes by taking the average of the NPV of each possible annual outcome, and using the probability of still being employed on that year as the weight.

    posted by Tacos Are Pretty Great at 10:35 AM on December 6, 2007


    Pastabagel writes "I think they were, because (a) most of those CEOs are managers/lawyers, not traders, and (b) it was certainly a surprise to the CEOs of Merril Lynch and Citibank who were very clearly fired."

    But not only due to the abysmal results , apparently
    After the losses first came to light, he threw a couple of senior bodies to the hounds and hinted at wrenching changes. But he may have engineered his own downfall by making overtures to Wachovia, a commercial bank, without first consulting his board. This infuriated some directors, not least because, once leaked, it signalled that Merrill was in play at a knock-down price.
    curious behavior , and
    Mr O’Neal also had some costly flaws. He was reluctant to share power, fearing rather than embracing strong-willed colleagues. Moreover, his lack of a trading background meant he was not ideally placed to steer Merrill through a credit boom and bust, in which a feel for complex traded products is a huge advantage.
    Incompetence meets arrogance and desire to save his seat, at the expense of ML. Which is normal, power doesnt lke to be dethroned , but it is so incredibily hard to believe that the rest of ML , with their sea of highly prized competence , with their own interest in obtaining returns for their own , didn't notice he was not competent
    and going to harm their returns , endanger their positions.

    Or they really didn't understand completely what they were doing , choosed just to hope that everything went for the best : which is so unlikely, oh so unlikely UNLESS you know you are not going to pay the biggest part of risk anyway.
    posted by elpapacito at 2:53 PM on December 6, 2007




    That's a great link, stavros. That guy gets it.
    posted by Malor at 6:15 PM on December 6, 2007


    The irony of the situation is that these vehicles, structured to provide liquidity to the markets and enable people to buy homes, are quite illiquid investments. They're hard to price and the ratings have proved to be worthless. There have been a couple of CDOs that have had to be unwound (liquidated) at around 25% of their value. That's what scares the hell out of these banks. They may have written down their investments to 75% or heaven forbid 50% of their value, yet in reality they may be lucky to collect 25%.
    posted by Frank Grimes at 8:16 PM on December 6, 2007


    Agreed, the Wall St. Journal editorial is excellent.

    For anyone who missed it the first time around, this was an excellent FPP with some pretty good discussion. The article which was the highlight of the post, is no longer at prudentbear.com, but you can read it here.
    posted by BigSky at 6:49 AM on December 7, 2007


    Excuse me, meant Washington Post.

    Eh, who's looking anyway...
    posted by BigSky at 2:38 PM on December 7, 2007


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