How CDOs give banks and hedge funds carte blanche.
By Les Leopold
The biggest and most lucrative playpen for elite financiers was in the creation, selling and better around housing securities. This game is directly responsible for inflating the housing bubble and then bursting it. Hedge funds were all over it, milking money on the way up and milking even more on the way down.
Betting Is For Chumps
Here's where we learn one of the most important facts of life about high finance. Betting is for chumps. If you really want to make billions you have to put your money on a sure thing. And the best way to make sure its sure is to design the bet yourself so you can't lose.
Ask yourself a basic question: Would you risk all that money if you didn't already know the outcome? Of course not. Better to put it under your mattress. The game of choice for big banks and hedge funds was the creation of synthetic collateralized debt obligations. (My book provides a step-by-step explanation. Here's a money-back guarantee: You won't get lost and you will learn how these securities actually work.)
How CDOs Gave Carte Blanche To Banks and Hedge Funds
Let's cut to the chase. These complex securities allowed banks and hedge funds to do two amazing things:
- They could create securities based on high risk mortgages (sub-prime) and turn them into AAA bonds -- the same rating as federally guaranteed government bonds. This was the pinnacle of financial alchemy -- turning dung into gold.
- They could design securities based on toxic assets that were designed to fail! Why? So that they could bet against them and walk off with billions of dollars.
It is an incontestable fact that the largest banks in collusion with hedge funds designed securities based on the worst mortgages so that those securities would rapidly fail. This allowed the hedge funds to short (bet against) those securities and make a killing.
Nowhere else in capitalism is this permitted.
Imagine if you were permitted to construct a home in such a way to make it burn down in six months so that you, the builder/seller could collect the insurance. Or imagine if you could deliberately design a drug that would kill the patient in a few weeks so that you the pharmaceutical company could collect on the dead person's life insurance policy. Totally absurd, right?
Well, in high finance this game is viewed as legitimate -- let the buyer beware.
It doesn't matter that the entire transaction has no redeeming economic value. In fact, it has enormous negative impacts on the economy. Yet, Republicans and Democrats alike welcomed the deregulation that gave birth to this madness.
Step 4: Use Other People's Money
Step 3: Rip off Entire Countries Because That's Where The Money Is
Step 2: Take, Don't Make
Step 1: How To Make A Million Dollars An Hour In Twelve Easy Steps