Crisis explainer
Saturday, October 17th, 2009 at
1:07 pm
Marketplace Senior Editor Paddy Hirsch gives a bubbly explanation of the intricacies of collateralized debt obligations those financial instruments that got us into this financial mess. … Marketplace business money financial crisis cdo
Tagged with: business • cdo • crisis • financial • Marketplace • money
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that last comment was designed to answer crapo87′s question.
The slick trick (crime ?) was the recalibration from BBB or even junk equity status to AAA status on being “re-bottled” in the second magnum.
Somebody should be in jail for that piece of fraud.
Cute how these pensions funds manage 100+bn dollars each and they can’t hire people smart enough to figure this out… ha ha hah ah ah ah ah a Sucks to be counting on a calpers pension!
Wallstreet CDO managers & execs knew all along this was a house of cards. Ratings agencies failed to get the right talent in the door & pay a Acompetative salary to keep an analyst on staff who understood these structures. Pensions & asset managers failed to do their diligence & evaluate the underlying structure of these CDOs by simply relying on what the understaffed, uninformed ratings agencies said.
So instead of holding the responsible party liable we bail them out? Good plan US Govt.
I like how you teach (simple and to the point)
that was the reason for putting different assets into the same bottle in the first place. Bottling bad debt with robust debt and then relabeling the bottle ‘contains AAA’ was designed to fool people into thinking it was safe money.
Ultimately, the people who had been mis-sold mortgages that they could never afford to pay for ended up with a 2-year reduced rate period so that this bubble had a 2 year life-span.
Plenty of time for the villains to get their money and run.
terrific video
you are genius, you really made me write my first comment ever
Thank you for explaining that!
Yeah, the metaphor wasn’t too bad.
Hopefully some of these idiots that caused this will soon be going to jail for a long time, they need to be locked up.
He doesn’t say what the glasses are. I don’t understand what they represent. It looks like they are the interest generated from a risk related mortgage, but then how can the second CDO manager buy interest?
Also what is a CDO, is it a crude form of a business?
CDO are “collateralized debt obligation”, it is basically packaged mortgages that people can invest in, in a sense kind of like a stock but profit is generated from interest in the mortgages.
The glasses are basically investors-the top glass represent the investor who invested with a relatively low risk, higher risk investment as you move down.
Another asset class manger comes along and pull money from investor to invest in the highest risk available for these CDO…everyone was buying these.
by the time everything exploded, they were making CDOs of CDO’s DCOs! so my guess is that what the banks are left with in their balance sheets is junk of junk’ junk! so please, don’t buy cap of crap’s crap with my tax money!!
in other words a cdo is a group of potentially worthless group of/ homes,credit cards,or any other over priced ,high intrest crap that they paid too much 4 .now there crying 4 a bailout
CDO’s in themselves aren’t that dangerous and can be “good” investments (e.g. a bond backed by a mortgage). But if you split a CDO into traunches and let’s say start rating them AAA, AA, etc. while they all came from a BBB bond then the stuff gets messy.
Europe will soon be the only continent in the world with it’s own `capital ´ !
Der Spiegel magazine reports that the un-elected EU Commission has `Big ambitions for Europes capital ´. These include 10,000 new offices for their 30,000 beurocrats and an office space as big as 40 football pitches for the un-elected Commissions employees.
Who’se to pay the hundreds of millions of Euros..` perhaps billions ´needed for this project ?
Us Europeans denied a voice !
Crisis ?
What crisis ?
That was awesome. I heard so much of about this stuff and now I finally understand it. So is this related to derivatives? How about leveraging. I heard of we need to unwind derivatives and deleverage? I also heard that once the unwinding of derivatives and the deleveraging is done, the dollar will collapse, is that true?
thats nice, wonder how long it took to think up this wonderful system.. im sure they are alot smarter than i. but i dont think it looks right to me oh well good luck peoples
It all began when the Fed prevented the harsh recession that should have occurred after the internet bubble. Lowering interest rate to a 46 years low created an incentive for all sorts of people to borrow and invest in then lucrative activities. People were drunk on the easy money and thought they were creating wealth when in fact they were just building a pyramid of sand. Those who foresaw this bubble bet against it and made billions ( John Paulson comes to mind). Remember the Say’s Law.
Outstanding presentation. Really enlightening and simple. Congratulations!
How is it possible to split BBB bond into groups containing AAA and AA ratings if they’re inherently high-risk?
That’s what is so confounding. These CDO derivatives (i.e. CDO’s of CDO’s) are divided into sections reflecting risk. So even though the BBB bonds have inherent risk, once divided they were allowed to be chopped up into different traunches (so that the least risky of the BBB bonds get rated AAA, AA and so on – these would be the last traunches in the original BBB bonds to default). You’re right that this makes no sense and ratings agencies are to blame for allowing this practice.
I like this guy a lot, and would like to find more of him/his work. What is “Marketplace”? Is it a magazine… a blog/website? Does this guy do videos elsewhere?