“This is exactly the story that Yves Smith retailed in appendix II of her book Econned. She didn’t name any names, though”

Ehhh?? Chapter 9 of ECONNED is all about *Magnetar*. Did you miss that bit?

With more time on my hands I read through the thread more carefully. If you are claiming that SIVs could have purchased all the super senior CDOs that were issued, I don’t know where you get data from, but it must be very different from mine.

The funded portions of the structured finance CDO market (i.e. the part that wasn’t super senior) were $300 billion in 2006 and $260 billion in 2007 per SIFMA. It’s seems safe to assume that we’re talking about at least $1 trillion in super senior tranches of structured finance CDOs.

The SIV market on the other hand was only $400 billion total and most of its assets were tier 2 bank capital. According to Bear Stearns only 11% of assets were CDOs and only 1% were ABS CDOs. How are buyers of $4 or even $40 billion in ABS super seniors, supposed to expand to cover a $1 trillion market?

I am not mistaken. You appear to be claiming that the dealers would not have had to find buyers for the “super” senior tranche in an all cash deal. All cash means cash buyers who are willing to accept those negligible yields must be found. They did not exist.

When you state that the supply of underlying bonds was insufficient, the implication is the yields on those bonds needed to fall in order for supply and demand to be in balance. Synthetics were clearly used to delay the operation of the market forces of supply and demand in the mortgage.

that’s the beauty of the Magnetar trade – THEY bought the equity tranche fully expecting it to blow up, and knowing they’d still win. I don’t think anyone bought the top rated tranche thinking it was risky though… ???

Yes KD, of course the AAA rating was bogus! And I would not be so quick to make the comfortable assumption that all buyers were deluded on that score, although as Lewis says of Hubler, most were not cynical enough.

Please. The only reason there was so much cash demand for AAA CDOs was because the yields were so high. And the only reason the yields were so high was because the large synthetic super-senior tranche in hybrid CDOs meant that the typical AAA CDO cash investor had exposure to $4 of synthetic losses for every $1 of investment. If you understand what a hybrid CDO is, then you know that synthetics were used to create the leveraged AAA yields that were necessary to keep cash investors in the market.

If all CDOs were all cash, AAA CDO yields would have had to be much lower on average, and I don’t think anybody would be talking about “unlimited demand”.

But then again I don’t make ridiculous amounts of money so the value of a dollar still means something to me.

I still can’t work up any sympathy for the view, which you share with Smith, that there something peculiarly evil about synthetics. Sure, the super-senior in the synthetic was unfunded (a VFN), but the same was effectively true for cash deals because in that case the SS was sold off to an SIV at zero capital charge. The key requirement in both cases was that there was unlimited demand for the AAA tranches. And it was really only the cash mortgage bonds that could push up house prices, so from a social perspective synthetics were less harmful than cash.