The CDO Daisy Chain | Probublica

Here's how the Wall Street Money Machine worked in the run-up to the financial collapse: Banks created CDOs from mortgage-backed securities. Banks often retained the large top portion, called the "Super Senior." The bottom portion, or "Equity," was often sold off to hedge funds. The middle portion, or "Mezzanine," often went into new CDOs. The main buyers of those new CDOs were once again the banks.

http://www.propublica.org/special/the-cdo-daisy-chain

Fantastic "House Advantage" Series from the NYT

Articles in the House Advantage series from The New York Times examine the ways that Wall Street banks can, and often do, gain advantages over their customers. Today’s giant banks not only create and sell investment products, but also bet on those products, and sometimes against them, putting their interests at odds with some of their customers’. The banks and their lobbyists also help fashion financial rules and regulations. And banks’ traders know what their customers are buying and selling, giving them a valuable edge.

Advantage: The Bankers Club — Helping to Write the Rules that Run the Market

A Secretive Banking Elite Rules Trade in Derivatives

By LOUISE STORY

In theory, clearinghouses exist to safeguard the integrity of the multitrillion-dollar derivatives market. In practice, they also defend big banks’ dominance.

December 12, 2010

Advantage: Financial — Getting Paid on the Upside, but Not Losing on the Downside

Banks Shared Clients’ Profits, but Not Losses

By LOUISE STORY

Banks like JPMorgan Chase offer to help big investors like pension funds earn a little extra. When it works, both win. When it doesn’t, only the client loses.

October 18, 2010

Advantage: Product Design — Designing Products Then Betting Against Them

Banks Bundled Bad Debt, Bet Against It and Won

By GRETCHEN MORGENSON and LOUISE STORY

Investigators are trying to determine whether banks like Goldman Sachs intentionally sold their clients especially risky mortgage-linked assets.

December 24, 2009

Advantage: Price Setting — Controlling the Marks on Investments, With Self-Interest in Mind

Testy Conflict With Goldman Helped Push A.I.G. to Edge

By GRETCHEN MORGENSON and LOUISE STORY

The bank’s demands for billions of dollars from the insurer bled it of cash, which the government later provided.

February 7, 2010

Advantage: Friendly Regulators — Watching Out for the Banks

In U.S. Bailout of A.I.G., Forgiveness for Big Banks

By LOUISE STORY and GRETCHEN MORGENSON

Federal regulators ignored recommendations to force banks that did business with A.I.G. to accept losses.

June 30, 2010

Advantage: Ratings Game — How Debt Watchdogs May Have Been Compromised

Rating Agencies Shared Data, and Wall St. Seized Advantage

By GRETCHEN MORGENSON and LOUISE STORY

Trying to be transparent, credit rating agencies made their computer models public, and banks used that knowledge to shape some of the investments involved in the financial crisis.

April 24, 2010

Advantage: Information — Inside Insights Help Protect Banks' Interests, but Leave Clients Behind

Clients Worried About Goldman’s Dueling Goals

By GRETCHEN MORGENSON and LOUISE STORY

The conflicts inherent in having a trading arm have created a wariness toward Goldman Sachs.

• Goldman Sachs’ Responses to The Times

On the third Wednesday of every month...

A Secretive Banking Elite Rules Trading in Derivatives

By LOUISE STORY

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.


The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.


Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.
In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks. (MORE).

 

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Andrew Ross Sorkin with Charlie Rose - The Financial Crisis + CDO's with Khan

& Khan explains CDO's or Collateralized Debt Obligations:

Europe Takes Lead on Regulating Over the Counter Derivatives following Fiasco in Greece

Draft report on OTC derivatives market reforms

London, February 2010

Werner Langen MEP has published a draft report on over-the-counter derivatives reforms to be considered by the European Parliament’s Economic and Monetary Affairs Committee in its decision on how the European derivatives markets should be regulated going forward. On 11 February 2010, Member of the European Parliament (MEP) Werner Langen published a draft report on the over-the-counter ( OTC) derivative market reforms in the European Union.  The Langen Report (the Report) is due to be discussed by the European Parliament’s Economic and Monetary Affairs Committee on 22 February 2010.

The Report generally supports the mandatory clearing of standardised derivatives through independent clearing between financial institutions.  It further endorses the need for greater risk management, transparency and the use of independent central counterparty (CCP) clearing.

Over the Counter Derivatives | The Warning | Khan Explains the Nuances

A 26 Trillion Dollar Black Hole

The Warning sees the light a decade later PBS Frontline October 2009...

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?" (more »)

http://www.pbs.org/wgbh/pages/frontline/warning/

From Wikipedia:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008).^[4] Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.

And Khan Spells it: