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Anorak | CDO Is Not An Operating System: The Next Financial Diasaster

CDO Is Not An Operating System: The Next Financial Diasaster

by | 23rd, October 2008

AS it slowly dawns on the world that the financial markets were simply a global version of the village that made a luxurious living taking in each other’s laundry, I thought you might like a hint as to the next disaster to unfold.

We know about sub-prime mortgages, and we know about credit default swaps. Admittedly we don’t know very much about them, but that’s because the people who created these little gems really don’t want us to know much about them. And, in fairness, many of the people who got enmeshed in them knew bugger all about it anyway, so let’s not beat up on ourselves about it.

So, coming up on the auction block next are the collateralized debt obligations tied to corporate credit; think of them as the equivalent of lousy loans made to homebuyers, but made to businesses instead.

Not any one business, of course, that would be far too rational; these are horrible collections of odds and ends stuck together with a lot of glue and, nowadays, prayer.

Unfortunately it appears that the same complete absence of interest in the underlying asset which enabled the banks to loan vast sums of money on dodgy houses to dodgy customers also applied to these deals, which means we can expect to see massive losses hitting the fan in the near future.

There have been around $660 billion in markdowns on subprime mortgages so far; you would have to be insanely optimistic to believe the $1.2 trillion market in CDOs is going to do any better, and it may well do worse. Some of the stuff is being written down by almost 90%, and whilst there may be coverage of it by credit default swaps, someone, somewhere is going to take a hit.

And if bankers like Eric Daniels, CEO of LloydsTSB, in receipt of £17 billion of the taxpayers’ money, keep making helpful statements about how they are going to carry on paying those wonderful bonuses, they may yet discover that the taxpayer doesn’t feel like bailing them out again…

Chenier



Posted: 23rd, October 2008 | In: Money Comments (26) | TrackBack | Permalink