Comments on: The silver lining to synthetic CDOs

By: klhoughton

klhoughton — Mon, 26 Apr 2010 02:40:33 +0000

What Sprizouse Said. Without the S-CDO, you have “pier loans,”–or, more accurately, mortgages you were stupid enough to write and/or buy because you thought that you would find The Bigger Fool.

With the S-CDO, you get to multiple that exposure while pretending you’re “managing risk.”

By: Paulman

Paulman — Wed, 14 Apr 2010 15:13:26 +0000

There is a response to this article that defends cash CDOs at http://seekingalpha.com/article/198645-t he-silver-lining-to-cash-cdos?source=fee d

By: JayTrader

JayTrader — Mon, 12 Apr 2010 13:36:58 +0000

You are correct in stating that S-CDO’s were a clear indication from the Banking/Wall Street community that housing was running out of steam. There was simply not enough migrant cherry pickers to pounce on. But the problem for the banks was that they had indeed hundreds of billions of ABS CDO’s on their books that was unaccounted and unhedged. Also, there were many smart hedge fund managers who were starting to buy CDS protection from the banks, and buying them at cheap prices. Wall Street was still drining the cool-aid at this moment in 2006. So what we have here is Wall Street instituions and the supply chain extremely long subprime. When the thought came across their minds that indeed the inmates were running the asylum, S-CDO’s started to be created. But to state that S-CDO’s was an emergency brake for the subprime crisis is patently untrue. The simple reason we had the final spike up in housing was indeed because of S-CDO’s. Most people even at that time had no clue what these things were. The S-CDO is a binary bet on housing with Wall Street dealing the cards. Many investors and speculators saw this as an even more reason to suggest that Housing will never correct. Finally the invention of the S-CDO was the reason we saw so much pain in the credit markets and economy. If S-CDO’s were never created then AIG wouldn’t have had to insure them. The S-CDO is the single worst financial product in the history of financial products as it made all of the counter parties pees in a pod. Credit Default Swaps on the other hand actually work as designed.

By: csissoko

csissoko — Mon, 12 Apr 2010 06:09:49 +0000

When you make the distinction between cash and synthetic CDOs, why don’t you discuss hybrid CDOs? It seems to me that’s where you’d see the action with synthetic assets affecting the cash market.

By: HBC

HBC — Mon, 12 Apr 2010 02:04:24 +0000

CDOs sucked all value out of homebuyers pockets, synthetic CDOs sucked the meaning out of our entire economy. Top marks for staying out of jail, lads.

Interestingly, both sets of culprits blame (via tea-party mouthpieces) the bankers’ plight on overconfident prospective homeowners believing they could actually afford something of value by subscribing to the American Dream on the banks’ apparently stated terms, forcing said humble bankers to fork over loans they really(?) didn’t want to make in the first place…

That dream having turned into a nightmare burning from the top down, the creators of toxic financial instruments, none of whom is above reproach yet all of whom are looking to buy time by editorial revisionism in relativization of their crimes, continue to fiddle.

Like many patient listeners, I’m already bored with the old one, so let’s hear a new tune, shall we? Something like the one you were just humming…

Some might submit, if Bernie Madoff had just kept going, we’d have had a cure for cystic fibrosis by 2011. Um, right. Then again, you might say we didn’t really need those homes that got built because everybody in America already has the best home (no) money can buy, so it’s actually better to have screwed the whole country rancid because absolutely no-one needs one of those, either. Yeah, that one has a nice ring to it, but it might be just a bit too close for comfort to the truth, and it doesn’t let MegaDeth off the hook.

OK then, for the sake of argument, which is better – dying of HIV or AIDS?

By: Mega

Mega — Sun, 11 Apr 2010 23:33:12 +0000

Look on the bright side. “[E]xcessive and irrational demand for collateralized debt obligations” provided a market-based rationalization for lowering lending standards, and in so doing solved that pesky “redlining” problem.

By: Sprizouse

Sprizouse — Sun, 11 Apr 2010 21:30:01 +0000

Synthetic CDOs might be less harmful, at the margin, to the average citizen (just as you’ve pointed out). But I think they’re clearly more harmful to the banking system, especially if CDO risks aren’t understood (and clearly they weren’t).

Which means we then have to debate which is directly more harmful — a housing bubble, or a bank run.

By: savo

savo — Sun, 11 Apr 2010 20:49:12 +0000

I’ve written CDS and CDO so many times, it all looks the same.

By: savo

savo — Sun, 11 Apr 2010 20:47:57 +0000

How does a synthetic CDO actually work? I read that the synthetic CDO is just a bunch of CDS that pay out if the mortgage market fails. So if you buy a synthetic CDO, do you get paid from the underlying CDS when the underlying-underlying bonds drop in value. Does that mean if you are long on a synthetic CDO, you are actually shorting the mortgage market?

Is it possible for the synthetic CDO to contain CDS that people have bought and do not want any more. That would allow the CDS buyers to sell it to some bank who then builds the synthetic CDO and sells the investors. The original CDS buyer no longer has to worry about the CDS. The bank will pay the premium for the CDS (with the money from the investors) and no new CDS will have to be created in the system. but i guess that isn’t financial innovation if nothing new comes out of it :)