Marketplace

This is excellent - just heard it on the radio and had to watch online - got my hubby to watch too. OK - our Friday night fun. Excellent!

This is very good, but I thought it was going to be exactly the same as was on Marketplace tonight 10-3-08.

Dolores

This is a different presentation than the one on the radio but equally excellent. However, a comment made in the radio show stated that the rating agencies rated these CDO’s as Triple A. And that comment was just glossed over. Why? How did they do that and how are they not accountable for fraud? Either Civilly or criminally. It would seem to me that anyone, or any entity relying on that rating has recourse in a lawsuit against them for Billions of Dollars. I hope their Errors and Ommissions Insurance policy was in effect.. Those companies, Moody’s and Standard and Poor should be indicted. They should be made to pay for their mistakes or intentional misdeeds. I believe it was an intentional Fraud designed to increase their profits at everyone else’s expense.

Maybe a report on that as well as the “Mark to Market” Rule would be helpful.. I suggest it. Thanks Alex

Very nicely put, thank you Marketplace!

Kind of think Elliott Spitzer was on to these people, but alas he got busted I mean set up.

These people and firms are responsible for a terrible collaspe coming.

Very clear explanation, more people need to watch this! Thank you!

I concur with Alexander D, where are the lawsuits and criminal indictments? Are these people or companies too big to be accountable?

What I am unclear about, and could use help understanding, is why was the “second guy” allowed to go out and create his own bottle filled with the risky bottom tier of glasses?

Is it just that no one ever thought of something so “clever” before, and we are now seeing that it wasn’t so smart?

Did that sort of thing used to be illegal, but a law/regulation got changed that allowed it?

I understand the culpability of Fannie/Freddie and their Congressional enablers (mostly Democrats, let’s be honest) in creating the “too fizzy” champagne in the first bottle… but it seems like what the second guy was doing with his second bottle ended up taking this mess to a whole new level.

This explains the CDO’s very clearly. What I don’t understand is why a bank would own a CDO. Can anyone explain this?

Nice analogy! Worked up quite a thirst watching that!! Cheers everyone!

Hi John

Why would a bank want to own a CDO? Mainly because of the attractive interest rates on these things, relative to their ratings. As banks came under pressure from shareholders to maximize value and generate more profit, so in-house asset managers looked around for ways to make more money from their deposits. The banks (and not just the banks) tended not to look too hard at the contents of these instruments. Rather they looked at, and trusted, the ratings that agencies placed on them. A high rating combined with a high interest rate looked irresistible, despite the fact that experience tells us that there is rarely any kind of reward without risk. No free lunch, in other words.

Hi John Why would a CDO manager go out and fill a second bottle with glasses from the bottom row of the first pyramid? Because in the good times, when those glasses in the first pyramid filled up every time, they generated a fat interest rate, enough to easily fill another pyramid and more. And get this, some managers went out and filled a THIRD bottle, with glasses from the second pyramid! Looking back it seems impossible that they would do something this crazy - how could you possibly guarantee that there would be enough interest paid to pull this off? Well, it seems these managers had a suspicion of this all along. In many cases, they went to insurance agencies like MBIA and Ambac, and got them to insure many of these bonds, thereby getting them a AAA rating. Which was fine….until MBIA and Ambac nearly collapsed under the strain. Now those ratings are useless, the champagne bottles are dry, and those glasses are gathering nothing but dust.

I’m also interested how this came about. Was there, as David said, a regulation that was lifted? If so, by whom?

My question is about the ratings agencies. How did they rate the stuff AAA… didn’t they care where the money was coming from to fill their glasses?

Great explanation. From an electronics point of view, CDOs are like a huge transistor that’s wired to amplify default. Before the first default comes along, it drains a lot of power, and everyone was happy living off the drain. Until the defaults came along. Beautiful, in a catastrophic sort of way.

Love the ref to “pyramid” in the explanation. My handy Wikipedia says: “A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. It has been known to come under many guises.”

If you were to say the the fees paid the agents of these instruments sufficed for the “incentive to enroll” test of the scheme definition, may we call this just a simple ole pyramid scheme?

Is it possible to get the video in text format, for my Mom who doesn’t have a computer Thank you Jerry Johnston

thank you!! you are a great teacher

Very informative and entertaining.I do however have a question in regard to the rating of the secondary CDO market. If the CDO’s that were used in the primary market were rated as BB, how can another fund manager repackage these same BB CDOs and have the rating system start all over again. maybe I missed that part.

Thanks, and keep up the great work.

Tom