Thursday, January 7, 2016

CDO - the atomic weapons of the financial world

Short explanation of CDO's (Collateralized debt obligations):
A CDO is a package of many mortgages of different house owners, often even from different banks which these banks can sell off and don't have to display anymore in their balance sheets. But these banks played it in another direction.

Comparing it to Ketchup they played the game this way:

Usually the company only took quality tomatoes (mortgages from solvent customers) for their ketchup. As the time went by, someone had a great idea, why not using some cheaper tomatoes (mortgages from customers who could fail with their payment) and mix it with the better ones - It won't hurt and we still get great reviews (commission for each new mortgage - good to polish our quarterly earnings).

Yes, they did it.

They took more and more of these cheaper tomatoes until they discovered that it would be more efficient to go even one step further. If we just mix it with a few nearly toxic tomatoes (subprimemortgages - customer who will surely fail to pay anytime soon), it won't hurt either.

Doing this toxic mix - it will lead sooner or later to lethality of the customers (and the company).

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