Word: cdos
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...Wall Street Journal blog reports, “Lewis praises ‘A.K. Barnett-Hart, a Harvard undergraduate who had just written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject?...
Bartnett-Hart’s findings? As she explains in her abstract, her research “suggest[s] that the problems in the CDO [Collateralized Debt Obligations, for the non-ec types out there] market were caused by a combination of poorly constructed CDOs, irresponsible underwriting practices, and flawed credit rating procedures.” Seems simple enough. But why couldn’t someone with more experience than an undergrad offer the same insight...
...Lehman wasn't alone. Merrill Lynch lost nearly $20 billion on investments in collateralized debt obligations (CDOs). Morgan Stanley had a nearly $4 billion loss in proprietary trading in the fourth quarter of 2007. Goldman Sachs spent $3 billion to bail out one of its hedge funds. And Citigroup has poured more than $3 billion into fixing its problems with structured investment vehicles, investments the bank set up with its own capital. Like Merrill, Citi lost big - as much as $15 billion, on the CDOs it decided to hold rather than sell off. In fact, nearly every large financial firm...
...Proprietary trading played a big role in manufacturing the CDOs and other instruments that were at the heart of the financial crisis," says Michael Madden, a managing director of the investment firm BlackEagle Partners and a former Lehman executive. "If firms weren't able to buy up the parts of these deals that wouldn't sell ... the game would have stopped a lot sooner...
...more Treasury bonds, pushing down yields and making Treasuries less attractive to other foreign investors. As a result, the rising demand for higher yielding U.S. debt opened the door for Wall Street investment bankers to spin out new classes of fixed-income securities, most notably collateralized debt obligations or CDOs. Much of the money raised by those investments was funneled in the mortgage market. That gave lenders the ability to make more loans, allowing more people to buy houses and push up real estate prices. Many of those loans, it turns out, were made to people who couldn't afford...