Word: bankes
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Dates: during 2000-2009
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...these bonds that the government's aggregator bank will have to deal with first. In a November survey officers at the nation's largest banks said CDOs were among the assets they would most like to sell should the government begin buying troubled bonds...
...Here's how Strata worked: The original investment (made by hedge funds or other big investors) was $20 million, plus a fee paid to the underwriter, Bank of America, for structuring the bond. Bank of America then took the $20 million and bought some liquid, safe asset, such as Treasury bonds. Those safe bonds then became Strata's collateral...
...comes the messy part. Bank of America used Strata's collateral as the backing against which it could write credit default swaps (CDS), that is, insurance contracts based on whether some other bonds get paid back. As a writer, or seller, of CDS contracts, Strata investors get a regular fee, much like a annual amount any insurance holder would pay, for guaranteeing the buyer of the insurance against losses on the bonds. All told, Bank of America wrote CDS contracts worth $20 million based on the debts of as many as 75 companies. Add the fees from the insurance contracts...
...course, the government hopes the aggregator bank model it is proposing, with private investors actually making the purchases, gets around the difficult job of having the government figuring out just what these bonds are worth. But it is not clear it will. Even if private investors name the prices, the government will still have to certify the values are reasonable before providing insurance or some other type of incentive to get the purchases complete, if it cares about not throwing more taxpayer money down the rat hole...
...question now is what Obama and his team learn from this experience. As he tries to maintain the consensus for another bank bailout, entitlement reform and perhaps health care reform, will he build his legislative coalitions from the left, as he did with the stimulus? Or construct them more with a centrist audience in mind...