CDOs For Dummies (Yes, Congress, We Are Looking At You)

Tyler Durden's picture

Every now and then, congressmen (and their staffers) have a knack of taking a terrific opportunity to investigate the alleged criminality at the apex of Wall Street (such as Tuesday's hearing with Darth Blankfein), and blow it by 1) pursuing personal agendas that have nothing to do with the matter at hand and 2) having no understanding of the matter at hand. And when the matter at hand is something as complex as CDOs (just ask Lloyd or Ben Bernanke - both will tell you that only Goldman understood these products well enough to trade them, and that only the Fed is smart enough to regulate them), televised embarrassment is sure to follow. Which is why we have prepared some bedside reading for all those who intend on grilling Lloyd on Tuesday.

We start with the CDO bible which everyone should read (after all JPM created CDS - they know more about synthetics and structured products than anyone else):

And just if there is any left over confusion we present:

And amusingly:

Make us proud congress





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BlackBeard's picture

Maxine Waters where are youuuuuu!?!?!?

mister_x's picture

"The "super senior" tranche in the example above is unfunded. The holder of that tranche makes no
principal investment but receives payments for assuming the risk that losses on the underlying
portfolio exceed 15% ($150 million). If they do, the holder of the super senior tranche would be
required to pay the CDO issuer the amount of losses above that level. The holder of the super senior
tranche is in a position similar to an insurance company that writes an $850 million insurance policy
with a $150 million deductible. The holder of the super senior tranche should feel pretty safe
because the likelihood that losses will exceed $150 million is quite small. This is evident from the
triple-A ratings on the Class A tranche, which is subordinate to the super senior tranche."


Hi-larious. I bet Joe Cassano and others at AIGFP read this to their kids every night before '08.

"Look Timmy, free money!"

Greater Fool's picture

What killed AIG and its leveraged super-senior positions was not realized losses. It was a rating agency downgrade brought about by large mark-to-market losses on those positions, which in turn caused them to need to post astronomical amounts of collateral because of the size of their exposure.

I do not have personal knowledge of how these positions have worked out for AIG; for all I know, they have been forced to pay some claims at this point. But in most cases, it is a collateral squeeze that causes derivative crashes. In many cases (LTCM, Amaranth), the positions that caused their holders' downfall actually end up making money....

ella's picture

Question.  If the rating agencies were well paid for high ratings, were they also rewarded for down grading their ratings on existing paper?  Why does anyone still find value in their ratings?

Greater Fool's picture

The AIG downgrade took place not only in the context of obvious danger to those who dealt in leverage, but also and always with the Enron debacle in mind, where they were the last to acknowledge that the company was bound for destruction. You could say that agencies are compensated directly for high ratings but only indirectly for downgrades, since obviously they have a business interest in retaining some shred of credibility.

I don't know of anyone who works in fixed income who pays attention to rating agencies for any reason aside from the fact that they are required to by law. Market regulation forbids certain kinds of investors from holding instruments below a certain ratings level. This is part of the reason rating agencies are so reluctant to downgrade: By doing so, in many cases they can have a hand in directly causing a default.

Fritz's picture

"televised embarrassment"

This is exactly why I won't watch.  These hearings end up being a full-on confirmation of Congressional incompetence... a freak show designed to  accomplish exactly nothing. 


trichotil's picture

premeditated malevolence loves to wear the incompetence mask; joe sixpack falls for it every time. "but..but, my government could never totally betray me." y'all been infiltrated by a zionist khazar cartel.

Miles Kendig's picture

Nomura's interns letter home is quite simply amazing, while their update presents a decent snapshot in time.

LiquidBrick's picture

Going long GS at 4:15pm on Tues.

ZeroPower's picture

Good post.

If there was only even one single guy sitting on the panel on tuesday, who would know his stuff (or at least be lectured by someone who knows his structured finance), then the tuesday hearings (especially talking with Fab) would probably be efficient and congress could get to the bottom of some things.

I feel like tuesday theyre going to simply keep asking

"Have you ever shorted a stock?!?!?" (see repeat of what happened to Fuld last week)

"Your bonuses were in the sum of $xMM - is that fair?!?!"

"Why is your jet better than my coach plane?"


Congress is shit, and all the panels have clueless people on them who ignore the experts are hand (Black last week, again, being an example).

MountainHawk's picture

You guys really need to add a Facebook 'share' button...when you manually share a link for example this page article title comes correct: "

CDOs For Dummies (Yes, Congress, We Are Looking At You)"


But the subtitle comes as this: "The governments of 10 western countries called Google evil in a letter demanding the company improve user privacy, citing concerns about Google Buzz and Street View services."


It'd be great to be able to get the word out...

aheady's picture

You can change the title and subtitle to anything you want by clicking on them and retyping.

anynonmous's picture

THE JPM CDO handbook is almost ten years old (Fab wasn't even old enough to drink)


(As a reminder Tuesday is part  of a three ring  circus intended to build  excitement for the performance in the center ring next week when they vote on "financial regulation". The circus will then leave town and Fab will disappear from view.)

overmedicatedundersexed's picture

Heads up Tyler: News this AM: Sir Warren Buffet ,the magnificent, peace be on his name, has been pushing/bribing  DC  to get all current derivativatives exempted from any new legislation..what a man of the people..seems he holds $68 billion of that stuff. me thinks he is in this up to his neck.

Ned Zeppelin's picture

Quite a read: the Nomura explanation of synthetic CDOs, which I believe to be the same sort of crapola as the Abacus transaction peddled by the Fabulous One on behalf of his superiors at GS. Highly recommended if you are fuzzy on what these CDOs are all about.

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