The Wall Street Money Machine (Kindle Single) Kindle Edition
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* the role of hedge fund Magnetar, which worked in concert with the banks to create high-risk CDOs which it then bet against
* how the banks artificially increased demand for CDO's by co-opting CDO manager and forcing them to buy these derivatives under threat of losing future business
Toward the nadir of US housing prices, Chicago-based hedge fund Magnetar came up with a novel concept: work directly with the big banks to create mortgage-backed securities comprised of mortgages most likely to default. The banks (Merrill, Citi, Goldman, etc.) then promoted these CDOs to their clients, while Magnetar took out short positions on them. This recalls to mind Goldman's now-infamous ABACUS fund, which the bank internally bet against while simultaneously promoting to its clients. Before long, Magnetar alone accounted for a large percentage of the CDO market.
At the same time, banks were beginning to realize that investor demand for its mortgage-based securities was beginning to flag. Rather than wind-down its reliance upon these toxic assets, they opted for a different approach: co-opt the supposedly independent fund managers and force them to purchase newly-issued CDO under threat. Rather than assert their independence, most fund managers complied with the banks' demands rather than put their lucrative fee streams in jeopardy. Indeed, the banks often made life easier by approaching potential future managers with propositions to set them up for the sole purpose of buying their toxic assets, thereby artificially stimulating demand. In several cases, the banks even went as far as creating new departments within their organizations charged with buying each new mortgage-backed security in return for a split on fee revenue.
The banks also relied heavily upon so-called CDO squared: creating a new CDO for the sole purpose of buying-up the most toxic elements of already-existing CDO's. In a moment of pure financial alchemy, the ratings agencies which had previously given these high-risk mortgage bonds lower ratings re-rated them at triple-A levels when they re-appeared in a new CDO. This cross-purchasing between CDO's also helped create the illusion of demand, and drove correlations within mortgage-backed securities to 1. The time-bomb had been set.
The net effect of this was to artificially prop-up prices due to the apparent continued demand for CDO's. This allowed the banks to extend their revenue streams for much longer than would have been the case had normal supply-demand curves dictated pricing. As a result, the worst offenders (Merrill) imploded the moment housing prices began to grow less quickly-- to say nothing of housing prices actually falling.
The piece makes for a quick read, but is necessarily limited in scope to the two areas above. For a reader already familiar with the causes of the 2008 crash, it makes for an enjoyable examination of two less-covered aspects of the disaster. For those less familiar with recent financial events, I recommend a primer such as Robert Scheer's The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street, Michael Lewis' The Big Short: Inside the Doomsday Machine, or Matt Taibbi's Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America.
The 'bad guy' in this story is the 'CDO - collateralized debt obligation', a box full of commitments to pay, i.e., mortgages. The banks created, sold and bought loads and loads of CDOs, unfortunately many of them made up from loans given to people who could not pay back. The all system started to crumble when nobody wanted to buy this latter and riskiest (toxic) portion of the CDOs. The banks then began to buy their own toxic CDOs exposing themselves to a huge risk of not getting back the enormous amount of money they lent. We all know that what was a risk is now a certainty since from all over the world banks have lost their (or better, our) money.
Only few 'smart' individuals earned from this disaster, those who insured themselves against such a risk. Once the toxic CDOs defaulted the insurance companies had to pay them back.
--- The single is full of the names of the people who made this possible, it is very interesting to see their faces and learn what they are doing now.
--- You can find all the articles collected in this single free of charge in ProPublica's website, but this is really the case in which is more than worth to buy it.
The authors address and explain the chain of events that lead to the 2008 financial meltdown, very informative and instructive.
The reading is easy but I do not recommend the Audible version, sound like your cellphone is reading which takes a lot of the emphasis to the fact they are narrating.
A very informative reading... recommended to all those that want to know who where behind (at least some) the 2008 financial crisis.
The Wall Street Money Machine (Kindle Single)
Most recent customer reviews
sad part of the whole deal its, eventually the execs are fired, but I don't know if they care.Read more