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Bank CDO Self-Dealing (And Modern Stock Trading) For Dummies

Tyler Durden's picture




 

Miss out on ProPublica's must read piece on self dealing in CDOs (which is currently translating to comparable practices in stocks, and virtually all risky assets, now that retail investors want out)? Here is your chance to catch up, courtesy of a few simple to understand cartoons. While not news to anyone who lived through the crazy days of 2006-2007, this simple visual should be archived and recreated in when alien historians try to explain why the world ended and the Dow was at 36,000,000 and going up, as it explains precisely what is happening in the stock market today.

 

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Wed, 09/01/2010 - 12:33 | 557815 Spalding_Smailes
Spalding_Smailes's picture

Get ready here comes  Mr. "Dick" Fuld

http://www.fcic.gov/watch/

Wed, 09/01/2010 - 12:34 | 557818 septicshock
septicshock's picture

excellent

Wed, 09/01/2010 - 12:37 | 557823 Ragnarok
Ragnarok's picture

Excellent, I love it!

Wed, 09/01/2010 - 12:38 | 557825 Nihilarian
Nihilarian's picture

CDO's are the Rusty Trombones of Wall St.

Wed, 09/01/2010 - 15:43 | 558254 orangedrinkandchips
orangedrinkandchips's picture

indeed, followed by a donkey punch- lights out!

 

 

Wed, 09/01/2010 - 12:43 | 557839 Cognitive Dissonance
Cognitive Dissonance's picture

CDOs for Dummies. Perfect for the first year JPM trainee program.

Wed, 09/01/2010 - 15:14 | 558168 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

Is it safe to assume that only someone with a PhD possesses the skills and knowledge to turn this clear, simple description of CDO into something totally inexplicable?

Wed, 09/01/2010 - 12:44 | 557841 Hephasteus
Hephasteus's picture

It's hard to manage risk when you're order of a million suckers keeps going unfilled.

Wed, 09/01/2010 - 12:48 | 557849 plocequ1
plocequ1's picture

Yes , The market is up today. It's up alot.

Wed, 09/01/2010 - 12:54 | 557862 LeBalance
LeBalance's picture

FOMC == Sole purchaser???

Meow!

Wed, 09/01/2010 - 14:14 | 558020 Henry Chinaski
Henry Chinaski's picture

Volatility! See any resemblance to 2007-8?

Wed, 09/01/2010 - 12:49 | 557853 tmosley
tmosley's picture

Really? I thought they worked more like this: http://www.youtube.com/watch?v=YDISckdpRO8

Wed, 09/01/2010 - 13:20 | 557911 digalert
digalert's picture

An excellent CONgress/SEC brief.

Wed, 09/01/2010 - 14:08 | 558008 cougar_w
cougar_w's picture

They already know how it works. But their "i r stoopid" act is pretty convincing.

Wed, 09/01/2010 - 13:24 | 557917 the grateful un...
the grateful unemployed's picture

I still don't understand why this doesn't work? The farmer (A) wants a better price for his corn, he sends his brother in law to the auction with some money, to put a bid under the corn. The brother in law ends up buying some of it, which immediately reverts to the farmer, but the farmer (A) gained a premium to market price on the corn he did sell, and there is still demand for corn the following week, but without (A) putting a bid under the market the price drops, and buyers who didn't want the corn when the price was too high, are buying wheat. (A) buys as much cheap corn as he can. 

Farmers (B~Z) haven't sold much corn and don't have any money. What corn (A) has sold made him a nice profit. He buys more from (B~Z), each time at a lower price. Each time he is in the market to sell, his brother in law protects the bid. When the price is low he buys directly. Eventually he corners the market. He makes a fortune. Seems easy enough unless the regulators get in the way.

Wed, 09/01/2010 - 14:02 | 557998 goldsaver
goldsaver's picture

OK, now you confused me. How did Farmer A make any profits by buying his own corn (thru his brother in law)? For your scenario to work there must be more buyers, other than the brother in law, willing to pay the higher price and no other farmers selling corn at that auction. And it would only work a couple of times because a) the higher prices would attract more corn sellers to the auction and b) the buyers would seek to purchase corn from other sources if the bid price is too high.

Of course, farmer A would then go to the local politician and have laws enacted that make it impossible for the other farmers to compete against him or forbids the buyers from buying corn from anywhere else but the auction. And once buyers switch to wheat, the Farmer would get a subsidy because his corn is a national security issue and the wheat sales would get taxed to pay for the subsidy.

Wed, 09/01/2010 - 14:09 | 558014 cougar_w
cougar_w's picture

Yup. It's called innovation.

Wed, 09/01/2010 - 15:16 | 558169 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

I thought it was called incest?

Wed, 09/01/2010 - 17:03 | 558419 the grateful un...
the grateful unemployed's picture

(A) profits by putting a floor under the bid, even if some money or corn reverts to him, thats zero cost (see Bernanke, UST, front running treasury auctions) At one extreme you want to corner the market, but its enough to control the market. In some markets supply and demand work the opposite of what the textbooks say, a too small float in stocks actually discourages buyers in size. Once you have jerked the retail buyers around, they go somewhere else, (see stock market, 2010). The intent in the CDO market is merely to keep a bid under the market, so new paper can be sold. 

As for your para2, the politicians don't have to pass laws, they merely need to avoid enforcing the ones they have written.Eventually (A) ends up with too much corn, if you recall that article on Hedge Funds, and heavily concentrated investments across the industry (stocks) consistently underperformed the benchmark, while lightly concentrated (but widely held) stocks, which were still under accumulation, outperformed. Once you have all the corn, there is no one left to buy (see stock share buyback programs) and you have to go private or take a beating selling all that overvalued stock (or corn) into a market which can't absorb it. All this leads to the stock melt up, and at the top there is no one to take it off your hands. 

Wed, 09/01/2010 - 13:27 | 557922 assumptionblindness
assumptionblindness's picture

Add a couple of new cells to describe how credit default swaps were attached to 'protect' the buyers and this may Pulitzer worthy. 

Wed, 09/01/2010 - 13:33 | 557928 ZeroPower
ZeroPower's picture

Anyone currently at a FI desk still enjoys the $$commissions from derivatives just as they were a few years earlier.

Wed, 09/01/2010 - 13:36 | 557935 Rick64
Rick64's picture

 They forgot the rating agencies.

Wed, 09/01/2010 - 13:41 | 557944 WineSorbet
WineSorbet's picture

Yes but the ISM number beat expectations.

Wed, 09/01/2010 - 14:14 | 558019 cougar_w
cougar_w's picture

Until next week, when the number is quietly revised downwards and the new number released to the reading public on page 232 of a 826 page report titled "Poultry Production Best Practices" at which point the revised number will then be used the next time numbers are issued, and since it was revised down a lot it will be easier for the next ISM report to improve MoM.

This stuff is easy once you get the hang of it.

Wed, 09/01/2010 - 13:44 | 557950 sheeple
sheeple's picture

err they forgot to mention the AAA stamps

Wed, 09/01/2010 - 13:46 | 557955 buzzsaw99
buzzsaw99's picture

Wrong. The banks did not take huge losses. That stinking pile is still sitting at the agencies, the fed, the fha, et al.

Wed, 09/01/2010 - 13:48 | 557962 Caviar Emptor
Caviar Emptor's picture

You don't get it. There never were enough buyers for all the CDOs. In fact there wasn't enough new real estate in the US on which to write the paper!!

Bankers engaged in a trans Atlantic conspiracy with their buddies to pyramid up the value of the paper and collect transaction fees for trading the paper back at ever higher prices, with ever greater leverage, producing fake profits for their institutions. That's why the Fed had no trouble getting foreign governments to engage in bailouts in 2008. 

They had already picked clean any real "investors" by 2005. There aren't that many retirement funds,university endowments and towns in Norway to support the gargantuan amount of paper they were selling. They needed to make fake purchases and trades with their trusted buddies. That's why banks in the developed world are all zombies now, it will take decades to write down the losses and the developed economies are the sick old men of the world, barely reaching 0% growth.

 

Wed, 09/01/2010 - 15:47 | 558273 orangedrinkandchips
orangedrinkandchips's picture

but there was a huge increase in real estate without baby jesus making more land...simple...take a city lot here in Chicago and build 4 condo's at 300k a piece. voila! instant real estate, just add suckas! lol....

 

Wed, 09/01/2010 - 14:18 | 558024 Threeggg
Threeggg's picture

Just watched a commercial on CNN for Visa Card

Know what their new slogan is ??

Wait for it, wait for it ..........................

             VISA

"Currency of Progress"

 

LOL !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1

Wed, 09/01/2010 - 14:44 | 558089 Sudden Debt
Sudden Debt's picture

Worried about maxing out your card?

DON'T WORRY!! YOU CAN ALWAYS APPLY FOR ANOTHER ONE!

Wed, 09/01/2010 - 15:11 | 558162 Hephasteus
Hephasteus's picture

Ya but exactly where does it progress to.

Wed, 09/01/2010 - 18:11 | 558491 Miss Expectations
Miss Expectations's picture

No more paper currency?  Plastic is Progress. 

Wed, 09/01/2010 - 14:22 | 558041 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

In Catch-22, Milo Minderbinder bought eggs for 7 cents and sold them to the government mess hall for 5 cents, and made a profit ...

Wed, 09/01/2010 - 14:25 | 558045 NOTW777
NOTW777's picture

another wonderful day for the criminal banks.  they get rewarded for their gross negligence in RE lending and MBS fraud with free tax $ from the fed recycled at fed auctions and HFT trading.

the public gets the shaft, foreclosed homes and 20% credit card rates and a destroyed economy.  some day, there will be hell to pay. 

Wed, 09/01/2010 - 14:29 | 558054 kathy.chamberli...
kathy.chamberlin@gmail.com's picture

this is more like it, ZH, men writing about finances and economics. this is what turns me on about your site. OH y e a h, and the picture cartoons are A+

Wed, 09/01/2010 - 14:41 | 558081 Hall 9000
Hall 9000's picture

 

Roubini Global Economics

 to ..... 3:01 AM (11 hours ago)

Greetings from RGE! - excerpt

"Given political and fiscal constraints and banks' unwillingness to lend, we remain doubtful of the potential for policy to prevent a double dip. Even a new round of monetary and quantitative easing can provide limited stimulus. The real issue facing the U.S. is the need for balance sheet deleveraging and repair, and that will be a multi-year process. The U.S. must brace itself for a long period of below-potential growth."

 

Time to say good-bye.

"Con te partirò (Time to say goodbye)
music by F.Sartori, words by L.Quarantotto 1995"

http://www.youtube.com/watch?v=ohXI3po8hK0

 

Wed, 09/01/2010 - 14:56 | 558115 vachon
vachon's picture

Brilliant, and ty for the CSPAN link.

Wed, 09/01/2010 - 15:55 | 558301 Grand Supercycle
Grand Supercycle's picture

Updated S&P500 charts:

http://stockmarket618.wordpress.com

Wed, 09/01/2010 - 21:00 | 558688 sethco
sethco's picture

can this scheme work with stocks as well? appears to be.

Wed, 09/01/2010 - 23:10 | 558908 williambanzai7
Wed, 09/29/2010 - 06:37 | 612090 Herry12
Herry12's picture

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Tue, 01/18/2011 - 06:14 | 883607 Jehnavi
Jehnavi's picture

If you own stocks of a profitable company, you can sell it off for a profit or earn dividends from the company. Dividends represent a share of annual profits, but not all companies pay this out. Growth stocks pay no dividends while income stocks do.

http://www.financeandmarkets.net/stock-market-for-dummies-what-you-need-...

Do NOT follow this link or you will be banned from the site!