ProPublica has a devastating take down of some of the self-inflicted wounds the big bailed out banks caused, all in the pursuit of bigger bonuses. Merrill lynch, CitiGroup, UBS, Goldmasn Sachs all come in for scathing criticism for their circular CDO sales to themselves:

“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. “

This is a very clear (written  for a non-technical audience) and focused article. Pro Publica doesn’t claim they are the first to report this (“Individual instances of these questionable trades have been reported before”). But ProPublica’s investigation (in partnership with NPR’s Planet Money), is comprehensive and written for the layperson. And, there is lovely chart porn (below) and a cartoon graphic.

Kudos to Jesse Eisinger and Jake Bernstein.


click for larger graphics


Banks’ Self-Dealing Super-Charged Financial Crisis
Jake Bernstein and Jesse Eisinger
ProPublica, August 26, 2010

Category: Bailouts, Credit, Derivatives

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “No One Left to Sell CDOs To? Sell to Yourself!”

  1. Bruman says:

    I guess this is generally called “eating your own dogfood,” but really should be, “eating your own s–t.” ;-/

  2. ACS says:

    And yet no punishment. I can’t believe people are not gathering in the streets to at least boil tar and collect feathers if not build gibbets.

  3. super_trooper says:

    Why would this be legal?
    There should be a headcount on the number of individuals that have been
    1. Executed
    2. Put in Jail (years total)
    3. Convicted/fined in a court of law

    for illegalities contributing to the financial crisis. Why aren’t people more upset? We all love bread and circuses, why not put them into the circus?

  4. rktbrkr says:

    The rounding error recovery

    We are probably in negative territory now with this trajectory…

    Economic statistics released Friday offered the clearest sign
    yet that the recovery in the United States had slowed to a
    crawl. The government lowered its estimate of economic growth
    in the second quarter to an annual rate of 1.6 percent, down
    from an initial estimate of 2.4 percent issued last month.

    The revision is a significant slowdown from the annual rate
    of 3.7 percent in the first quarter and 5 percent in the last
    three months of 2009.

  5. louis says:

    panem et circenses

  6. Mannwich says:

    How is this not blatant criminal fraud? How is it that nobody of any significance has been charged with any crime whatsoever?

  7. rktbrkr says:

    How about AIG selling insurance on financial instruments, collecting premiums and then shrugging their shoulders when it was time to pay? Why is it immoral for individuals to walk away from mortgages but simply a “business decision” when corporations do it? If fraud is committed by a corporation on a daily basis it’s just a “business practice” but if it’s committed occasionally by an individual it’s a crime?

  8. llandson2000 says:

    Off topic question/favor: does anyone know where I can find historical earnings and earnings estimates online for S&P 500? There used to be a link to a spreadsheet online with comprehensive historical earnings and earnings estimates, but it appears that that spreadsheet is not being updated anymore.

  9. ashpelham2 says:

    It has occurred to me that what should be considered criminal, and most likely is, are acts that are simply too far out in front of those who would enforce the law to be punished. We are talking complicated schemes that are hard to prosecute and harder to actually find the true perpetrators. So many hands were involved, that whole organizations are likely implicated. Think of a well-run, multi-layered crime family, except no one has fingerprints, and there are no video cameras to catch the acts.

    The Justice Dept simply cannot keep up with all the “crime”, and probably doesn’t have an adequate way to bring it to trial anyway.

    It could be years, or it could be never. Me, I’d offer up amnesty for admitting guilt and returning monies, with the threat being that everyone would be prosecuted under new, expanded RICO rules.

  10. Dow says:

    “The Justice Dept simply cannot keep up with all the “crime”, and probably doesn’t have an adequate way to bring it to trial anyway.”

    More commonly referred to as ‘pro-business’ by the Chamber of Commerce.

  11. b_thunder says:

    Did the so-called “risk officers” know about this and didn’t stop it? – yes
    Did the senior executives know about this, allowed it to proceed and signed off on the bonuses? – yes
    Did the boards know what was going on, did they approve of it, and did they sign off on the bonuses for the execs? – maybe
    Did any of the so-called “bank analysts” raise “red flags?” – no.

    And nothing (other than 7- and 8-figure annual bonuses) will ever happen to them.

    I want to be a CDO banker!!!!

  12. Mannwich says:

    LOL Dow.

  13. What Barry? Does you system automatically block out the word Ince$t?

    I wrote: I call it financial ince$t but the post disappeared down the memory hole

  14. The only crime committed here is that when these self-dealt CDO’s blew up in the financial system face, the government stepped in to rescue the perpetuators of the fraud.

    If (previously) private parties wish to play a delusional game of musical CDO’s, when the music stops, the party without a seat should fall on his ass. AIG comes to mind.

    That failure was not allowed, and the parties behaved as if they knew failure would not be allowed, tells a great deal about how confident the players were that they had Uncle Sam by the short hairs.

  15. Curm,

    save on Pixels, = it to “High Treason”

  16. TDL says:

    I am pretty sure that self dealing is a violation of multiple regs & laws. At the very least why haven’t any shareholders stepped up to the plate and sued these banks?


  17. Mannwich says:

    @TDL: Because the shareholders were made whole via the bailouts.

  18. Mannwich says:

    Well, the ones that didn’t sell on the way down.

  19. ewmayer says:

    I expect a followup in the not-too-distant future, titled “No One Left to Sell Sovereign Debt To? Sell to Yourself!”

  20. @ewmayer:

    What do you think $1.25 trillion of GSE’s bonds purchased by the Fed constituted?

  21. Arequipa01 says:

    I’d like to share a few thoughts on these two last posts on CDOs (although I must confess to significant anxiety about exposing my prattle-prone prose to the probing proboscis of the linguistics/intellect sniffers):

    The cartooned representation of the CDO scam* reminds me of the medieval practice of graphically representing Biblical passages in various formats for the edification(?) of the pre-literate faithful. Having an idea of God’s covenant albeit via fresco is good, but we should probably learn to read.

    In early 2002 I was contracted to translate a Texas hedge fund’s investment proposals based on CDOs, CLOs, CMOs etc into Spanish. In order to generate possibly one of the first texts in Sp outside of the high-walled world of high finance on this subject matter, the primary task I faced was figuring out what the Freddy Fender they were talking about. When I figured them out and finished the translation, I returned the English documents to them and refused to hand over the translation. No fee, no guilt. The scales had fallen from my eyes. And I saw clearly just how poor I was and would likely remain!

    *scam- some assert that ‘scam’ comes from the Gaelic phase ‘es cam é’- it is false.

  22. philipat says:


    “Off topic question/favor: does anyone know where I can find historical earnings and earnings estimates online for S&P 500? There used to be a link to a spreadsheet online with comprehensive historical earnings and earnings estimates, but it appears that that spreadsheet is not being updated anymore.”

    Yes, I have used the same spreadsheet over the years as a great source of accurate information, especially for the GAAP earnings, whicg the TV pundits never use now because Operating earnings allow them to claim multiples are low and stocks are cheap. The link is as follows, but you’re right, they have stopped updating it:

    I would also appreciate details of an alternative source of this information via a thread or a PM.

  23. philipat says:

    Back on topic, the Banksters don’t care and it will happen again for sure.

    The bonuses are already in the Caymans and the Taxpayer will bailout the Banks because they are “Too big to fail”. Call it moral hazard or “Capitalism for the poor and socialism for the rich”, the end result is the same, and NONE of them are in jail.

    Is the US a great country or what?

  24. VennData says:

    Mom knocks on banker’s bedroom door and asked, “Hey… Hey bankers.. what are you doing in their?”


  25. ywsimw says:

    I witnessed this first hand. It’s true !

    I worked for the banking arm of a (now bailed-out) financial group (I left before the meltdown…). We were structuring CDOs that we were then selling to the insurance arm of the same group. We recorded profits (and got bonuses) for selling the stuff but the insurers never recorded any losses (we used different accounting methods and had different financial auditors that did not talk to each other ; it’s like we were booking the two ends of the same trade at different prices !). Net result for the group was a profit that never existed.

    Many people were actually aware of this ; but did not care…

  26. Mannwich says:

    So much for Sarbanes-Oxley nipping corporate fraud in the bud.

  27. philipat says:

    Actually, SarbOx is the perfect tool for jailing these ars*holes. It sets forth that a CEO must sign off, both monthly on internal Financial Statements and quarterly on Official Financial Statements.

    In a less corruot system, all of these guys would be in jail. That less corrupt system used to be the US. What went wrong?

  28. philipat says:

    IMHO, it is the rule of law that seperates a devleoped country from a Banana Republic?

    Pinya Coladas anyoen?

  29. Sunny129 says:

    Paraphrasing Dick Nixon.

    If Banksters DO IT, is LEGAL!

    SEC, FED and FASB all silent during this CRIME got committed.

    This is a display of POWER of Financial Oligarchy over our Govt and Society!

    We have ‘BEND OVER” Congress, regulators and MSM !

    Till there is meaningful reform of Campaign Contribution – the root cause, expect NOTHING in future.

    America, the Best Democracy Money can BUY!

  30. Mannwich says:

    @philipat: What’s the point of a “perfect tool” if it ain’t used in the perfect time?

  31. willid3 says:

    why isn’t this fraud? after all the companies are reporting sales as part of their public statements, problem is they are selling to them selves?

    is this the most perfect business world or what? you can sell stuff to your selves and report that as expenses and income! and you don’t have to spend a dime doing it!

  32. Mannwich says:

    …….and then pay yourselves bonuses based on this “revenue” earned. Genius. And criminal.

  33. willid3 says:

    yup. brilliant new business plan that selling to your self is. no need to marketing.
    and more om it!

  34. philipat says:


    “@philipat: What’s the point of a “perfect tool” if it ain’t used in the perfect time?”

    Agreed. Not much point in having these laws and not using them.

  35. [...] month, we discussed the great Pro-Publica investigation of self-dealing (and now bailed-out) banks, buying their own [...]