Must See ProPublica Investigative Takedown Of Rampant CDO Fraud At Merrill, Citigroup, Other Banks

ProPublica writers Jesse Eisenger and Jake Bernstein have written a very important piece.  Here is an excerpt, though I suggest you read the entire thing.

Banks’ Self-Dealing Super-Charged Financial Crisis

Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:

They created fake demand.

A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged.

The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs.

As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created -- and ultimately provided most of the money for -- new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain [1] that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.

Individual instances of these questionable trades have been reported before, but ProPublica's investigation, done in partnership with NPR's Planet Money [2], shows that by late 2006 they became a common industry practice.

Continue reading at ProPublica

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A Bank’s Best Customer: Its Own CDOs

• See full-size image

• Circular CDOs: Data Table

• The CDO Daisy Chain (Awesome Infographic)

• Cartoon: Welcome to CDO World!

All part of a larger ProPublica investigative series:

• The Wall Street Money Machine

• How One Hedge Fund Helped Keep the Housing Bubble Going

• A Crib Sheet on Wall Street’s Self-Dealing Money Machine

• The SEC Gets Involved

• Citigroup Saw No Red Flags Even as It Made Bolder Bets 

• Merrill CDOs Under SEC View

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