USA Financial situation & why Banks sold CDOs for profit

Who will finance a US budget deficit forecast to swell to $22 trillion this year? The bankers kept their winnings, the governments stay in the red, the average person loses his home and job & the Bankers go out and buy bigger homes and jets and life goes on till the next crash. The Banks made the crash happen as there were no restrictions and the FED with guys like Greenspan, Bernanke & Paulson etc also must take the blame as Fed today keeps printing.

Standard and Poor, Fitch, & also Moody one of the leading providers of credit ratings, the Financial Times reported that Moody had given the worthless subprime mortgages that caused the banks to implode -- on paper, at least, so that they could then claim trillions in tax payers money -- a triple A credit rating because of a computer glitch.

In spite of the evidence of fraud by Moody, no investigation was opened into how a „computer glitch“ could cause billions of useless debt to be given the highest credit rating and not the junk credit rating, four levels lower that they should have had. But they werent the only ones?? In fact, it emerged that Moody knew as early as 2007 that it had given the junk subprime mortgage and other debt an incorrect rating and did nothing to correct the triple A ratings as that mean't they would drop in commission payments. The agencies continued to give top ratings to mortgage-backed securities months after the housing market started to collapse so they could reap as much money as possible. The agencies then unleashed on the financial system a flood of downgrades in July 2007 that crashed the whole sub prime & those holding the CDOs etc.

Only in 2008 did Moody’s change the rating, helping the banks to declare themselves in debt (after a convenient change in the mark to market accounting rule) and so allowing them to get trillions in tax payer money in the form of a „bailout“ as well as have a pretext to withdraw gigantic sums of money from the economy and precipitate an economic crisis.A change in the credit rating was why Lehman Brothers suddenly“ went belly up in 2008

CDOs were first sold in the 1980s, & called "securitization" that fueled the craze boom in available credit. Lenders could package their mortgages, credit card loans, equipment leases, even corporate debt, and sell securities backed by the interest payments. This maneuver transferred the risk of not getting paid to the investors who bought the securities. The deals returned cash to lenders, which they could then use to obtain new loans. This pushed borrowing rates lower, creating a bonanza for consumers, lenders and investors. Wall St saw it so used it also. They collected these debts up then resold them to get bonuses for themselves & profit with zero controls in place. The ratings agencies then rated the securities to AAA ratings and they made a fortune. It became a ladder to climb to the top. Because mortgage-backed securities paid higher yields than other securities with the same ratings, they became wildly popular for use as CDO collateral. The CDO market took off. From $157 billion issued in 2004, it ballooned to $557 billion in 2006.

It became a frenzy chain. Home owners started buying homes & property they couldn't afford with no equity nor the ability to repay---it didn't matter. Mortgage brokers closed deals so fast they couldn't think, even inventing phony income data for borrowers--& noone cared. The loans were quickly sold into pools that issued securities, so the brokers were rarely on the hook for any defaults. Wall Street traders snapped up the securities for repackaging as CDOs. Everyone in this chain earned money upfront, in the form of fees & bonuses. They needed to sell those bonds for the 1.1% commission so on $11m that was a cool $1.1m fee--- no one blinked and those that did or questioned were quickly off the list of preferred brokers. But it was the rating agencies that held the key and without their AAA ratings the whole process stayed afloat until the crash had to happen. As you see Moodys blame a computer glitch but then a computer glitch is manually seen and all propertiers that have AAA ratings were never scrutinized manually??? so this is utter nonsense.

It came in July 2007 when two Bear Stearns hedge funds loaded with CDOs collapsed. That sent CDO prices tumbling and created instability that fed on itself as more finance houses found their ratings dropped & they now had toxic CDOs they couldn't move.

CDOs are derivatives — synthetic financial instruments derived from another asset.

Here's the recipe for a CDO: you package low-rated debt like subprime mortgages and then break the package into pieces, called tranches. Then, you pay to play. Some are the first in line to get hit by any defaults, so they offer high yields; others are last to get hit, with lower yields. Rating agencies such as Moodys, Standard & Poor's and Fitch Ratings wave their magic wand over these top tranches and declare them to be AAA rated. Top of the class. Here's where it gets toxic. Parts of CDOs are about as baseless as bonds can be — some are not even investment grade. The assumption has been that even if the toxic waste bonds really stink, the quality tranches can keep the CDO above water. And life goes on.

The problem is that CDOs were untested; there was not much history to suggest CDOs would behave the same way as AAA corporate bonds. So started the subprime crash which lead to stocks and even unrealted.9 years ago, Russian bonds defaulted. A surprising result of this default was the spectacular failure of Long-Term Capital Management (LTCM), a hedge fund in Greenwich, Conn. Surprising because LTCM had Russian bonds. They nearly took the global financial structure with them.Today a number of hedge funds are failing; others are seeing returns plunge. Among these is Goldman Sachs's flagship Global Alpha Fund, which burned a quarter of its $10 billion value over the last few weeks. And just as LTCM was free of the Russian debt that precipitated its collapse, Global Alpha was not a player in subprime junk. Global Alpha's problems have not come from mortgages at all, but from a portfolio of stocks.The root of the problem is high leverage. For example, when this debacle hit, one of Goldman's funds was leveraged 6 to 1, so every dollar of investor capital claimed six dollars of positions. Thats bad as its the start of a down syndrome.

J.P. Morgan say $918 billion worth of CDOs were issued in 2006. According to Merrill Lynch & Co., the top 5 issuers of CDOs in 2006 were:

Cohen & Co.
Trust Company of the West
Goldman Sachs Group, Inc.
Duke Funding Management LLC
Aladdin Capital Management LLC.

A CDO is an asset-backed security (ABS) that can be backed by:

investment-grade or high-yield corporate bonds;
emerging market bonds;
residential mortgage-backed securities (RMBS);
commercial mortgage-backed securities (CMBS);
other asset-backed securities;
real estate investment trusts (REITs);
bank loans, special situation loans and distressed debt;
and even other CDOs.

CDOs differ from collateralized mortgage obligations (CMOs) primarily in providing differing amounts of credit quality that are grouped into 3 or more tranches that have the same maturity.

Collateralized bond obligations (CBOs) are CDOs based on bonds or other CDOs

Collateralized loan obligations (CLO) are CDOs based on bank loans. Many of the subprime loans have been packaged and sold as CLOs.

How a CDO is Created

A CDO is usually formed by a bank or other financial firm by setting up a corporation specifically for the CDO located offshore that don't tax corporations, eg. Cayman Islands. A trustee, usually a bank, is chosen to manage the CDO and issues monthly reports on the debt composition of the CDO to its investors after its established.

The CDO manager buys asset-backed securities for collateral, then sells commercial paper, which is short-term debt, to other financial institutions. The commercial paper is based on the top-rated tranches, which may constitute up to 90% of the CDO. Often, CDO managers have agreements with 1 or more banks to buy the commercial paper if there are no takers in the market place.

To guarantee a good rating, the rating agencies—Fitch, Moody's, and S & P—help to assemble the CDO by specifying the requirements that must be met to obtain a top rating. The CDO manager consults and negotiates a credit rating for each tranche of the CDO. Because of the complexity of CDOs, rating agencies charge up to 3 times more money for rating CDOs than for rating bonds & even they do not know if the assets are good or bad. CDOs also are almost impossible to value. So the rating agencies controlled the CDOs, and the profits that rating agencies make from CDOs,money managers now say that it is risky to rely on credit ratings alone in assessing the safety of CDOs—it should be supported by scrutiny of the prospectuses and the monthly reports issued by the trustee.