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No One Left to Sell CDOs To? Sell to Yourself!

Posted By Barry Ritholtz On August 27, 2010 @ 8:26 am In Bailouts,Credit,Derivatives | Comments Disabled

ProPublica [1] has a devastating take down [2] 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 [3] 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 [4]), is comprehensive and written for the layperson. And, there is lovely chart porn (below) and a cartoon graphic [5].

Kudos to Jesse Eisinger and Jake Bernstein.

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click for larger graphics
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Sources:
Banks’ Self-Dealing Super-Charged Financial Crisis [2]
Jake Bernstein and Jesse Eisinger
ProPublica, August 26, 2010
http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/08/no-one-left-to-sell-cdos-to-sell-to-yourself/

URLs in this post:

[1] ProPublica: http://www.propublica.org

[2] devastating take down: http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis

[3] circular CDO: http://projects.propublica.org/tables/circular_cdos

[4] NPR’s Planet Money: http://npr.org/money

[5] cartoon graphic: http://www.ritholtz.com/blog/2010/08/welcome-to-cdo-world/

[6] Image: http://www.ritholtz.com/blog/wp-content/uploads/2010/08/cdo_daisy_chain_100826.gif

[7] Image: http://www.ritholtz.com/blog/wp-content/uploads/2010/08/banks_bubbles_100826.gif

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