Self-Dealing in CDOs Exposed (no big surprise)

[heyheybooboo]

Banks’ Self-Dealing Super-Charged Financial Crisis

Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:

They created fake demand.

A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged.

The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs.

...

The scams involved 'skimming the cream,' bundling the garbage and trading their own trash. The rotting tranches were further bundled into bigger piles of crap, generating substantial fee income as they were traded.

By ridding themselves of the Crapola, the banks were relieved of the obligation to set aside reserves to cover any losses.

An executive from Trainer Wortham, a CDO manager, recalls a 2005 conversation with Ricciardi. "I wasn't going to buy other CDOs. Chris said: 'You don't get it. You have got to buy other guys' CDOs to get your deal done. That's how it works.'"

When the manager refused, Ricciardi told him, "'That's it. You are not going to get another deal done.'"

Trainer Wortham largely withdrew from the market, concerned about the practice and the overheated prices for CDOs.

The article doesn't "name-names" of specific individuals but does provide a substantial list of circular CDOs whereby a bank would purchase substantial tranches of other CDOs created by that same bank.

It gets even more incestuous: By 2007, 20 percent of the market was in self-dealing.

The portion of CDOs owned by other CDOs grew right alongside the market. What had been 5 percent of CDOs now came to constitute as much as 30 or 40 percent of new CDOs. (Wall Street also rolled out CDOs that were almost entirely made up of CDOs, called 'CDO squareds'.) ....

It worked like this: A CDO would buy a piece of another CDO, which then returned the favor.

Past time for folks to go to jail.




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[werepossum]

Banks’ Self-Dealing Super-Charged Financial Crisis






The scams involved 'skimming the cream,' bundling the garbage and trading their own trash. The rotting tranches were further bundled into bigger piles of crap, generating substantial fee income as they were traded.

By ridding themselves of the Crapola, the banks were relieved of the obligation to set aside reserves to cover any losses.





The article doesn't "name-names" of specific individuals but does provide a substantial list of circular CDOs whereby a bank would purchase substantial tranches of other CDOs created by that same bank.

It gets even more incestuous: By 2007, 20 percent of the market was in self-dealing.




Past time for folks to go to jail.




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Is this in fact illegal? I do agree that some people need to go to jail, but it needs to be people who did things actually illegal at the time, not just shady or self-serving.

My biggest question in all this is where the hell were the independent analysts while all this was going down? I expect government to act incompetently and from political motivations. I certainly expect bankers and Wall Street types to do anything necessary to make that big bonus happen. But where the hell were the financial analysts who are independent of government and banking, those who make their livings analyzing the market and advising clients what to buy? They should have been collectively screaming their heads off.

 

[jackschmittusa]

werepossum

Many of those analysts and even state regulators did go to the government about the banks (mortgage and investment), Maddoff, brokers, etc. and were ignored. Those stories trickled out one by one, and were covered on backpages like it was minor news.

 

[FuzzyBee]

werepossum

Many of those analysts and even state regulators did go to the government about the banks (mortgage and investment), Maddoff, brokers, etc. and were ignored. Those stories trickled out one by one, and were covered on backpages like it was minor news.

Too much back-scratching going on on multiple levels to expose these dealings.

 

[Jhhnn]

Self -crashing banking isn't a bug in the free market deregulated ownership society, it's a feature. The benefits will trickle down RSN, just you wait and see.

Complaining about it is just class warfare and envy... by a buncha disgruntled leftist muslim terrarists who hate Uhmerricuh...

 

[Corn]

Self -crashing banking isn't a bug in the free market deregulated ownership society, it's a feature. The benefits will trickle down RSN, just you wait and see.

Complaining about it is just class warfare and envy... by a buncha disgruntled leftist muslim terrarists who hate Uhmerricuh...

Stupidity comes easy to you, don't it? At least you've got your lefty buzzwords listed in the correct order........

 

[Jhhnn]

Stupidity comes easy to you, don't it? At least you've got your lefty buzzwords listed in the correct order........

Yet I realize that snide derision, your forte, isn't any sort of argument at all...

Here's a pic of GWB's finest banking regulators helping to make it all possible-

http://dorkmonger.blogspot.com/2008/11/cutting-red-tape.html

 

[WHAMPOM]

Is this in fact illegal? I do agree that some people need to go to jail, but it needs to be people who did things actually illegal at the time, not just shady or self-serving.

My biggest question in all this is where the hell were the independent analysts while all this was going down? I expect government to act incompetently and from political motivations. I certainly expect bankers and Wall Street types to do anything necessary to make that big bonus happen. But where the hell were the financial analysts who are independent of government and banking, those who make their livings analyzing the market and advising clients what to buy? They should have been collectively screaming their heads off.

You just weren't listening. Unless you watched PBS or had NPR on you missed out. Remember any mainline TV coverage of the protesters in the "FREE SPEECH ZONES", I sure don't.

 

[Craig234]

This is what you get when you have democracy corrupted, the voters voting for nonsense issues while the corporatocracy paying for ads, co-opting democracy.

You can't point your finger and say 'it's their fault', there is blame to go around, it's a systemic problem. And it actually could be and probably will get much worse.

The fact we lack the political will to pass a constitutional amendment putting corporations back in their place is a place to start with blame.

The citizens might go in the streets (on a Koch-brothers-paid bus) to a tea party event or to protest a mosque blocks from the WTC, but not for that amendment.

Turn on your tv, open the paper, no one is talking about that amendment.

 

[ayabe]

Is this in fact illegal? I do agree that some people need to go to jail, but it needs to be people who did things actually illegal at the time, not just shady or self-serving.

My biggest question in all this is where the hell were the independent analysts while all this was going down? I expect government to act incompetently and from political motivations. I certainly expect bankers and Wall Street types to do anything necessary to make that big bonus happen. But where the hell were the financial analysts who are independent of government and banking, those who make their livings analyzing the market and advising clients what to buy? They should have been collectively screaming their heads off.

The credit rating agencies were all in on this scam and issued AAA ratings to this stuff, knowing it to be complete shit. IIRC not a single person has been held accountable over there, they've basically been ignored completely.

 

[JS80]

I'm not seeing the exposé. Sounds like this was just a way to "mark" a price on these things so the bankers on the deal could get their bonus. And probably to convince the auditors what they were worth.

But everybody knows this.

 

[FuzzyBee]

This is what you get when you have democracy corrupted, the voters voting for nonsense issues while the corporatocracy paying for ads, co-opting democracy.

You can't point your finger and say 'it's their fault', there is blame to go around, it's a systemic problem. And it actually could be and probably will get much worse.

The fact we lack the political will to pass a constitutional amendment putting corporations back in their place is a place to start with blame.

The citizens might go in the streets (on a Koch-brothers-paid bus) to a tea party event or to protest a mosque blocks from the WTC, but not for that amendment.

Turn on your tv, open the paper, no one is talking about that amendment.

Apparently, you can, because that's all you ever do here.

 

[zephyrprime]

My biggest question in all this is where the hell were the independent analysts while all this was going down? I expect government to act incompetently and from political motivations. I certainly expect bankers and Wall Street types to do anything necessary to make that big bonus happen. But where the hell were the financial analysts who are independent of government and banking, those who make their livings analyzing the market and advising clients what to buy? They should have been collectively screaming their heads off.

Nobody's independent. Remember, in this weird industry, analysts are paid by the sellers. They were paid to make positive recommendations. The buyers rarely used separate analysts and even when they did, most didn't know what was going on.

 

[brencat]

My biggest question in all this is where the hell were the independent analysts while all this was going down? I expect government to act incompetently and from political motivations. I certainly expect bankers and Wall Street types to do anything necessary to make that big bonus happen. But where the hell were the financial analysts who are independent of government and banking, those who make their livings analyzing the market and advising clients what to buy? They should have been collectively screaming their heads off.

CDOs, synthetic CDOs, and related credit derivatives are some of the most esoteric and complex financial products on Wall St. This wasn't a mom & pop product -- these are institutional-only products requiring sophisticated models and some bright individuals to structure, analyze, and trade them. I'm not at all surprised the regulators were in over their heads and ill equipped to monitor this stuff. They still are.

 

[Jhhnn]

CDOs, synthetic CDOs, and related credit derivatives are some of the most esoteric and complex financial products on Wall St. This wasn't a mom & pop product -- these are institutional-only products requiring sophisticated models and some bright individuals to structure, analyze, and trade them. I'm not at all surprised the regulators were in over their heads and ill equipped to monitor this stuff. They still are.

Great. Instead of a deal nobody could refuse, we got a deal nobody could understand, except for the guys who wrote it... just the thing for pension plans and 401k's, right?

Not surprisingly, the first CDO's were created as an "investment vehicle" by none other than Drexel Burnham and Lambert back in the 80's...

 

[Darwin333]

CDOs, synthetic CDOs, and related credit derivatives are some of the most esoteric and complex financial products on Wall St. This wasn't a mom & pop product -- these are institutional-only products requiring sophisticated models and some bright individuals to structure, analyze, and trade them. I'm not at all surprised the regulators were in over their heads and ill equipped to monitor this stuff. They still are.

I have read plenty of articles stating that whistle blowers at the rating agencies were in on the gig. They get paid by the banks to rate the stuff, if the banks don't get the ratings they want they take their business to the next rating agency who knows that if he wants to keep their business he has to give them the rating they want. Also keep in mind that we are talking about some of the largest accounts in the industry so losing them was pretty much not an option if you wanted to keep your job.

The entire thing was a big ass fraud and it worked unbelievably well.

 

[Jhhnn]

I have read plenty of articles stating that whistle blowers at the rating agencies were in on the gig. They get paid by the banks to rate the stuff, if the banks don't get the ratings they want they take their business to the next rating agency who knows that if he wants to keep their business he has to give them the rating they want. Also keep in mind that we are talking about some of the largest accounts in the industry so losing them was pretty much not an option if you wanted to keep your job.

The entire thing was a big ass fraud and it worked unbelievably well.

Kinda like extortion, right?

 

[manimal]

CDOs, synthetic CDOs, and related credit derivatives are some of the most esoteric and complex financial products on Wall St. This wasn't a mom & pop product -- these are institutional-only products requiring sophisticated models and some bright individuals to structure, analyze, and trade them. I'm not at all surprised the regulators were in over their heads and ill equipped to monitor this stuff. They still are.

While the uninformed may see this as a shell game the insiders saw the value in covering their asses-assets. The inherent sophistication of the financial markets has created a vacuum of responsibility. In a country where oversight is seen as a negative financial markets began moving to a unregulated space.

The shadow markets began small and developed into trillion dollar exchanges outside of any oversight and responsibility. They were able to package products with substandard value because some analalyst gave them a good rating....

Sadly the recent financial regulation had little bite into these practices... These things are going to continue and the quants will continue their race to the riches...

If this isnt a redistribution of wealth I do not know what is....I personally hate that saying but sometimes it does stick...

Prior to changing careers and going back to school for another masters I interned at Calamos asset mngmt. Even back in 1993 there were many talking about innovative financial products coming online that would have fantastic upside and value. When pressed even the on staff geniuses had a hard time explaining the actual product...

 

[Craig234]

Apparently, you can, because that's all you ever do here.

Sorry it's too complicated for you, but on some things you can isolate blame, on others not.

You are welcome not to read my posts, for both our sakes, since you don't get such points.

 

[Craig234]

If this isnt a redistribution of wealth I do not know what is....I personally hate that saying but sometimes it does stick...

For the right, the phrase never means the policies when the rich do things that help them get more wealth from the rest of society - as they have been doing hugely for 30 years.

But if the rest of society does anything to have any limits to the concentration of wealth, that gets the label.

This is one more reason why Warren Buffet said there is a class war his side is winning.

 

[heyheybooboo]

Kinda like extortion, right?

That, and a fraudulent ponzi scheme that leverages the same (New! Improved! With Even More Stench in the Pile!) crapola back and forth between willing partners to generate fee income and hit bonus targets.

Just spread a new (ever-thinning) layer of gravy on top and pass the same fecal matter back and forth in newer bundles.

It's the Wall Street version of 'Hot Potato'. I bet they had some great 'snickers' at our expense joking about particular worthless tranches they were trading back and forth.

"" You, hoser. You got me with the XYZ Dung but I dumped the Cow Pie IV on you last quarter! HA HA HA HA HA! ""

Huge lack of fiduciary oversight by the bosses and BoTs to perpetuate this fraud.




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[Darwin333]

Kinda like extortion, right?

Sure, I'll go with that. Or maybe bribery so we can throw both sides in jail.

 

[Mursilis]

Past time for folks to go to jail.

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For once, I agree with you.

 

[Darwin333]

That, and a fraudulent ponzi scheme that leverages the same (New! Improved! With Even More Stench in the Pile!) crapola back and forth between willing partners to generate fee income and hit bonus targets.

Just spread a new (ever-thinning) layer of gravy on top and pass the same fecal matter back and forth in newer bundles.

It's the Wall Street version of 'Hot Potato'. I bet they had some great 'snickers' at our expense joking about particular worthless tranches they were trading back and forth.

"" You, hoser. You got me with the XYZ Dung but I dumped the Cow Pie IV on you last quarter! HA HA HA HA HA! ""

Huge lack of fiduciary oversight by the bosses and BoTs to perpetuate this fraud.




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If it makes you feel any better one of those oversight "bosses" is now our Sec. of the Treasury. Oh wait, thats not a good thing is it?

 

[Mursilis]

CDOs, synthetic CDOs, and related credit derivatives are some of the most esoteric and complex financial products on Wall St. This wasn't a mom & pop product -- these are institutional-only products requiring sophisticated models and some bright individuals to structure, analyze, and trade them. I'm not at all surprised the regulators were in over their heads and ill equipped to monitor this stuff. They still are.

So true. I ask myself, as we're wondering amongst the wreckage of the Big Meltdown of '08, what safeguards are now in place to prevent this from happening again? The only answer I can find is, none. It doesn't look like much has really changed.