Europe's Latest Rescue Deux Ex Machina: A CDO... SQUARED

Tyler Durden's picture

Steve Liesman has just broken news of the latest European bail out mechanism which will likely push risk higher for at least a few hours. Why just a few hours? Because what according to Liesman the ECB is about to propose, is nothing short of not just a CDO, but a CDO SQUARED. We are still waiting for more information, but according to his description of what this last ditch bailout bazooka (before Eurobonds of course), is that the ECB will take the debt bought by sovereign governments and will issue EURs against EFSF/ESM bonds as collateral: this is in its simplest definition, a CDO Squared (because as we have described in the past, the EFSF is simply a CDO), which in turn means that the systemic leverage of the Eurozone is about to rise 8-fold. If you thought the capitalization of the ECB was bad before, you ain't seen nothing yet. Expect cubed and quadratic iterations by the end of the week when the half life of this latest bailout rumor dies out. Oh, and expect many more headlines out of Europe talking about bailouts and hyperinflation as noted earlier.

And here is the summary quotes from Bloomberg:


In other news, this is what a diagram of the ECB will soon look like.

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ZeroPower's picture

Apply leverage on top of leverage for desired effect..check.

Look at what this has achieved in the past, as recently as 2007... fail.

Barb Dwire's picture

So glad I stopped day trading. There's no way to compete with the constant flow of bullshit "plans". I'm short IWM - in a couple of months that will make me $$$.

Ahmeexnal's picture

Now we know why they won't allow Mr. Market to short them.

But Mr. Market will have his way with them nonetheless.


TruthInSunshine's picture

The EUR stalwarts thought I and many others had some sort of personal or emotional grudge (it's not personal, and I have no emotional fixation on any paper fiat, whether the EUR or USD) against the EUR whenever I've voiced the opinion that the EUR is doomed partly, but in no small manner, because the European Union is doomed, and vice-versa.

If they follow through on this, as it's being reported, it's night-night EUR, sleep tight.

Total, absolute, stark-raving mad insanity...that's what this plan is.

It's almost as if they're trying to implode the EU & EUR (hmmmm).

LeBalance's picture

stressing the "almost." /lol/

falak pema's picture

sounds fusional...maybe they will have children.

SWRichmond's picture

One Bank to bring them all, and in the darkness bind them.

Belarus's picture

Stay strong, Barb. This market is so twisted I wouldn't use Ben B.'s money in it. The market is down a scant 8.5% year to date, not including dividends, while Europe is exploding, while LSAP is off, while China's market falls apart, while the DAX, FTSE, and CAC are all down 30%.....we're in the middle of the greater depression.....and yet....stocks are down just a mere 8.5%, which can be saved every other day by typing in "greece saved" rumor mill in google.

Seriosuly, who is buying all this horseshit at this stage of the game? Puh-lease, raise your hand for us if you're human and buy these rallies? 


Translational Lift's picture

And there will be no S&P downgrade.....S&P just received a "WELLS NOTICE" from the SEC presumably for daring to  take on the US GUBMENT...............

Good luck all....

Ropingdown's picture

Sorry to jump the line by replying:  The EIB is an EU institution, not a Euro-Zone institution.  It's senior executives, many of the eight key VP's,  have been dying to make EIB the vehicle to launch a Euro-Bond.  They've been agitating to do it for months.  This latest "rumor" just shows innovation and doggedness of their part.  Still trying.  The positions at the top are plumb jobs filled with party loyalists for 10 year terms, rotating between EU nations. I would suppose the majority are extremely Europhile and majority socialist of various sorts.    If they don't get a fiscal union then their dreams are crushed, one supposes.  Who knows what outcome will result?  No one. Some seem to do more thorough and frequent Bayesian updates than others, clearly.  Others live on passion and hope.  Oh, and change.

carbonmutant's picture

Is the EU constructing a bad bank?

trav7777's picture

Yeah, this is pretty much it.  The EFSF buys bonds and so the participants are kinda owners pro rata in a CDO that contains bonds.  However, there's no tranching that I can see.  Not like Germany puts in more money and gets a senior cut of the repayments.  That makes it more like a vanilla MBS pool.

This new SPV would be a real CDO.  A squared CDO would be a vehicle built out of tranches, itself re-tranched.

If they do this right, they will aggregate sovereign bonds and then sell slices of them on seniority ranks, with differing yields and payment hierarchy...iow, a real CDO.  That becomes the supranational securitization of sovereign debt.

Once those tranches are out there floating around, someone can then aggregate them and retranche and make the whole system blow the fuck up.  I told Douchinger that if YOU didn't request the credit that the gov't would on your behalf.

spanish inquisition's picture

Shouldn't be a problem. I am guessing everything they buy will be rated AAA.

mayhem_korner's picture

Expect cubed and quadratic iterations by the end of the week when the half life of this latest bailout rumor dies out.

Polynomial bailout.





Bastiat's picture

Got this visual of a guy jumping out of a plane with just a financial calculator!  LOL!

Jim in MN's picture

Assume a can opener (old econ joke)...

CClarity's picture

And still, no fundamental problems solved.  Just a "fix".  Toxins continue to flow infecting more and more.

Chuck Bone's picture

So greek and italian yields jump on this news.... WE'RE SAVED!

LongSoupLine's picture

more frosting on a pile of crap does not make it a cake...

ThirdCoastSurfer's picture

As long as your preferred status guarantees that you only eat the frosting, it only rots your teeth. 

mayhem_korner's picture

Isn't there a "did they try this at Lehman" test somewhere in the CB manual?

GeneMarchbanks's picture

Am I the only one not laughing? I really think they might be serious here.

Ropingdown's picture

They are definitely serious, 17 versions of serious and with lots of votes behind them despite their general disdain for constant injections of democracy into the deliberations.  We've seen stranger things happen than a temporarily-successful Union that pulls every lever imaginable to get one more breath.  It can go on longer than many imagine.  And obviously there is a lot of Imagining going on.  "Imagineering," laugh. Lots of these people, EU EZ psuedo-mandarins are intense political pros, but not really finanical pros. And they have political theories.  Heard this bit before?  Back when the currency union was founded?

pauhana's picture

Nothin' from nothin' leaves nothin'
You gotta have somethin'
If you wanna be with me
Nothin' from nothin' leaves nothin'
You gotta have somethin'
If you wanna be with me

Billy Preston, 1975

Timmay's picture

When the surgery turns radical, the underlying condition becomes more obvious.


papaswamp's picture

I'm not sure humans will be in existance by the time this bailout gets paid off...we will have mutated into something else....

Going Loco's picture

Intelligent beings, possibly. One can always hope.

mayhem_korner's picture



Circular firing squad.  Squared.  :D

machineh's picture

With concentric circles of participants ... a/k/a a 'euro jerk.'

Cdad's picture

Man, they got Liesman on the 'round the clock rumor machine.  His cred is right about now...on par with that of the S&P. far these guys are willing to sell their credibility down.

GeneMarchbanks's picture

if by credibility you mean soul, then yes I concur.

Cdad's picture

The thing about Liesman is...he knows better.  I wish my television had not recently turned into a radio, as I would have liked to have seen Liesman's face today as he pimped this shit.  

GeneMarchbanks's picture

His face still has that beady-eyed dead menace thing as before. As it turns out you've missed nothing.

Ropingdown's picture

Yep, pimping this shit is right, just to get the crowd from Luxembourg to stop auto-dialing.  There's some seriously wonderful bureaucratic careers coming along, and jobs for the next generation, if they can just pull off this really big EU EZ thing and get some real "give us your money, punk" tax revenue headed their way.  None of this Italian revenue to pay Italian debt...gotta hand some of that over, Guido!  Consider it a fee to the EU EZ EIB, much like Citi might ordinarily charge...move along little man.  I think it may well in the end appear like a bit of America by the time they're done, a sort of Norman Rockwell painting with Euro models.  An interpretation of our deal where the money and rule-making all flow to this center of government, DC.  It is extremely green this bit, because the lobbyists don't have to travel so far, nor the bag men.  Really, it works.

tkinfo's picture

"Hey Honey, we just got another Euro Mastercard in the mail. We are saved" :)

TruthInSunshine's picture

Steve LIESman is going to do shitarine commercials (shitarine being a butter substitute), wherein he'll take a big, juicy bite of feces spread on toast, and feign surprise as he tells his wife that "I can't believe it's not butter!"

GenX Investor's picture

Liesman is my favorite comedian on Comedy News Business Central (CNBC)

SDRII's picture



"Under its Statute, the Bank is authorized to have maximum loans outstanding equivalent to two and a half times its capital which is contributed by Germany, UK, Italy, Spain and France....150 of the 230B or so of capital commited. Implies somthing like 150B of lending capacity net of loans to be distributed?

Each Member State’s share in the Bank’s capital is based on its economic weight within the European Union (expressed in GDP) at the time of  its accession"

CapitalistRock's picture

Public relations nightmare. They wouldn't intentionally step on this landmine unless there was no where else to go!

LeBalance's picture

but that other place to step means giving up power and they will not do that.

bankonzhongguo's picture

At The End, all this kabuki theater will result in "the real debts" being transferred to a supposedly solvent extra-legal entity who will generously dictate terms to the peoples of Archaic Lands.

What a farce.




mayhem_korner's picture

U just back from Mordor there, Frodo?

L G Butz PhD's picture

So then, buy the gold dip right?

Shouldn't I wait for gold prices to settle a bit? Is it possible gold hits $1418 sometime before ECB actually DOES something? And if so, what probability do you assign to that possibility?


mayhem_korner's picture

Good luck with the "settling" of gold prices anytime soon.

What's your objective?  Are you looking for an entry point to trade paper gold?  Good luck with the knife-catching, market-timing, technical chart-reading stuff.

If you're buying physical, to have and to hold 'til death do you part, forget about today's price and think about DCA over time.

My two cents.

L G Butz PhD's picture


1) ST trade with 1% of capital

2) studying ZH comment section predictions

mayhem_korner's picture

Well, good luck.  Read intently, and not just here at ZH.  It's not an advisory forum.