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Crisis explainer: Uncorking CDOs
Senior Editor Paddy Hirsch helped us in the Marketplace office understand how some of Wall Street's complicated investment instruments led us into this financial mess. We thought his "champagne glass" explanation of "collateralized debt obligations" at the whiteboard might make it clear for you too. So we put "professor" Hirsch on video.
And you can get more from Rico Gagliano's report: Financial Crisis 101
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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.
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 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
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