How Banks' Fake Daisy-Chains Led to Meltdown

Self-dealing artificially propped up market for CDOs
By Evann Gastaldo,  Newser Staff
Posted Aug 27, 2010 10:40 AM CDT
A Merrill Lynch office is seen in New York, Wednesday, Oct. 24, 2007.   (AP Photo/Seth Wenig)

(Newser) – An extensive ProPublica investigation reveals what it calls “one of the greatest episodes of self-dealing in financial history.” Banks, most notably Merrill Lynch, set the stage for the economic meltdown by rewarding themselves for said “self-dealing” during the final two years of the housing bubble. They created “daisy chains” of collateralized debt obligations or CDOs—securities backed by mortgages that became increasingly difficult to sell. The result? Banks created fake demand by buying the CDOs themselves, thus ensuring their generous bonuses would be preserved.

ProPublica follows the timeline from 2004, when the housing market was booming and CDOs were hot, to 2006, when skittish investors were nervous about the riskier pieces of CDOs and banks increased the practice of creating new CDOs to purchase those riskier parts … and then created yet more new CDOs to buy the risky parts of the last set. By 2007, when CDOs’ values began declining, 67% of the riskier slices were purchased by other CDOs as opposed to 36% three years earlier. Click here for the full article.

My Take on This Story
Show results without voting  |