As the housing market started to collapse in the middle of 2006, investors became more and more nervous about the smelliest sections of CDOs–collateralized debt obligations that pooled different mortgage bonds together. So what did banks like Merrill Lynch, Citigroup and UBS do? According to ProPublica and NPR‘s big follow-up to the Magnetar exposé, they created new CDOs that bought up the unsellable ones. “The result was a daisy chain that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those,” Jake Bernstein and Jesse Eisinger write. The banks “cranked up an assembly line that otherwise should have flagged.”
“You don’t have a trading partner? Create one,” a former executive told the reporters. They found 85 examples over only two years when pairs of CDOs bought up pieces of each others’ unsold chunks. It added up to $107 billion. Fifty CDO managers are apparently under investigation.
The piece has some fun sections on go-go era executives like Merrill Lynch’s Chris Ricciardi. Back before the big collapse came, Mr. Ricciardi got a Wall Street Journal profile that said he liked to be called the grandfather of CDOs, and that he helped “turn Merrill into the Wal-Mart of the CDO industry.” He took potential partners out for golf and dinner: “I’m going to make you rich,” his pitch went, according to a former colleague, “You just have to be my bitch.” When he left the firm, the CDO business was taken over by a poker player named Ken Margolis, who was once threatened by a casino owner with “a fork through his eye.”
By the first quarter of 2007, even as the market was tanking, Wall Street turned out $70 billion in new mortgage CDOs. The credit agencies, meanwhile, wouldn’t “check whether you were buying good bonds,” a CDO manager executive said. To see what the buying and selling of “rotting pieces of CDOs” looked like, try ProPublica’s cartoon Welcome to CDO World!
There is also a song that was apparently commissioned from Auto-Tune the News for the story. Sadly, it doesn’t have to with CDOs, and, frankly, isn’t as good as “Bed Intruder Song.” And it’s certainly no “Bet Against the American Dream.”