General Discussion
In reply to the discussion: If you have not seen The Big Short, I seriously recommend you watch. [View all]longship
(40,416 posts)Don't you mean CDOs? Collateralized Debt Obligations. In the case of the mortgage meltdown of 2007-8, they weren't so collateralized as they were sold.
The epitome of insidiousness of the big Wall Street banks wasn't the CDO. It was the synthetic CDO, whose contents were not just mortgages, but also credit default swaps on other mortgage bonds (which precisely replicated the bond's risk therefore the original mortgage bond), plus since there were trash bonds which wouldn't sell because they were junk. They wrapped them all up into the synthetic CDOs, with the same layered tranches. S&P and Moodies would still rate the top tranches as AAA (equal in security to federal treasury bonds, no risk) even though they were nothing but recycled junk from the bottom tranches of other mortgage bonds.
And the Wall Street banks did this over and over and over again. The entire mortgage bond infrastructure was nothing but tissue paper. And every retirement account in the world bought them. And they were all replicated by insurance, the credit default swaps, which gave the investment banks even more product to sell, since the swap exactly replicated the risk of the original mortgages and could be built into yet more CDOs.
The only problem is, if house prices did not keep on rising, the whole thing collapsed on itself. As soon as the teaser rates on the adjustable rate mortgages expired, those mortgages would default, all at once. When that happened, the mortgage bonds would default, ALL AT ONCE. The credit default swaps would then become due, ALL AT ONCE. The issuers of that insurance (mainly AIG) would all go broke, ALL AT ONCE. Then, the Wall Street banks holding an incredible amount of debt on their books would then collapse, ALL AT ONCE.
That is what happened in 2008. And when Treasury Secretary Hank Paulson let Lehmann Bros fail, the collapse went into hyperdrive. We were clusterfucked.
And the $800 billion TARP bailout had zero for those who lost their homes, because the only thing the government cared about was the Wall Street banks. They were too fucking big to fail.
Thank you very little Bill Clinton and George W. Bush.