Synthetic CDOs - Money for Nothin? Until Markets Collapse!

[chinaco]

Oops the title should read Synthetic CDOs.

Looks like many signed up that should not have done so. The problem is that these people were taking risks with other people's money on bets they knew nothing about.

PARKES, Australia -- In this town of 10,000 in what Australians call "the bush," administrator Alan McCormack has a headache. The county council is poised to lose millions of dollars if more U.S. companies succumb to a deepening recession...

Insurance Deals Spread Pain of U.S. Defaults World-Wide - WSJ.com

 

[W2R]

Oops the title should read Synthetic CDOs.

OK, done...

 

[chinaco]

Nice tutorial on sub-prime synthetic CDO.

There are a variety of them.

The group that produced this tutorial has a nice web site. Many similar tutorials are on Youtube.

YouTube - Synthetic CDO that fails in subprime securitization

 

[Independent]

Thanks for the post. It fills in facts where I had only had impressions. (The link in the OP sent me to a "subscriber only" WSJ page. I found a copy posted here: Australians Lose Millions In Bernie Madoff Scandal In... In spite of the link title, the text was about this CDO deal. )

In my, non-specialist, language, I'd say that the investors in Australia were providing capital for an insurance company. If the company goes under, they lose their money. Of course, the "company" avoided typical insurance regulators.

This sentence is critical to me: "Nearly a quarter of the synthetic-CDO securities that started with investment-grade credit ratings from S&P have already been cut to junk, according to data from the rating firm."

I expect tha the investors were smply relying on S&P. In the absence of effective gov't regulation, the rating agencies had a lot of power.