CDOs And Swaps Are Comming Back

Be afraid, be very afraid.

The Big Short Expose

I'm probably late to the table but I just finished watching the Wall St. expose movie, The Big Short, on Netflix. All one needs to know to understand this jargon heavy movie is the meaning of CDOs, Credit Default Swaps and bond rating agency.

CDO - A collateralized debt obligation: When ordinary folks buy a home they finance the purchase with a mortgage from a lending institution such as a bank. The bank, in the bad old days, in turn sold that mortgage along with thousands of others that were bundled and sold to Wall St. investment banks as CDO bonds. Banks got their money and the quality of the mortgages were of little importance to them.

Note: 2017 investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.

Credit Default Swap – basically an insurance policy to protect CDO investors from market losses.

Bond rating agency: A company that assess the creditworthiness of both debt securities and their issuers. In the United States, the three primary bond rating agencies are Standard and Poor's, Moody's and Fitch.

Note: These agencies began a bidding war to obtain market share by overrating many CDOs.

How soon we forget the great heartrending losses of ordinary people's homes and investments as a result of this criminal negligence.

How soon we forget the lessons learned from 2000-2008. Now we hear the GOP dominated congress that the 2010, Dodd-Frank act that tightened the rules governing the financial sector, is under relentless attack. House Republicans, believe the legislation went too far and that its regulations have slowed the recovery.

President-elect Donald Trump has mentioned Dodd-Frank only briefly, saying he wants major changes.

Paul Hunter