[mark000]

You are about to learn what a "Synthetic CDO" is. It turns out the banks have covered their asses. Lots of these things got sold to charities and councils.

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As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system.

Alternatively, the triggering of default on the trillions of dollars worth of synthetic CDOs that were sold before 2007 could be a disaster that tips the world from recession into depression. Nobody knows, but it won’t be a small event.

A synthetic CDO is a collateralised debt obligation that is based on credit default swaps rather physical debt securities.
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It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable.

Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders.

In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too.

They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were.
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If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.

It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory.

The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles.

The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything.
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But for the banks, it’s happy days. Suddenly, when the ninth reference entity tips over, they will be flooded with capital. It’s possible they will have so much new capital, they won’t know what to do with it.

This is entirely uncharted territory so it’s impossible to know what will happen, but it is possible that the credit crunch will come to sudden and complete end, like the passing of a tornado that has left devastation in its wake, along with an eerie silence.
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[idiom]

Yes we can?

[cbxer55]

Yes we can?

[Rod_Cloutier]

An investment scheme set up originialy by Mickael Milken (isn't he still in prison?), combine that with a bizarre system that no one but a banker can fully understand, sprinkle on the obscurities of the offshore 'Cayman island' type bank accounts, shake and stir in compete deregulation without oversight, then serve to an unsuspecting world of goodwill charities, and municipal city councils.

Then watch out.., the mixture will have 'unspecified' results when consumed like a mixture served up by Yosimity Sam from some old Bugs Bunny cartoon....

[efarmer]

True enough Drexel and gang used it first for a client who ended up getting sponged up by the Resolution Trust bailout for the Savings and Loan bubble. But interesting to me is the real adaption of David X. Li's math modeling via software to drive the widespread adoption of CDO's during the present decade.

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Is a link to the math, which is intricate, but look at the big picture of how the math was run against the last decade or so of known events to prove it's worth for the paper. Yup, gets us everytime it seems, the future is very predictable based on the past until it isn't , and then it ain't. In engineering there are control systems called PID or Proportional-Integral-Derivative used for controlling motions and processes. You can run them often without any Derivative, just the proportional response and an integral to smooth the response. The Derivative is a sweetener really, until you use too much, and then you end up with an oscillating and out of control mess in response to step changes. Kind of like the last year on Wall Street for example.

[shortonoil]

efarmer said:

The Derivative is a sweetener really, until you use too much, and then you end up with an oscillating and out of control mess in response to step changes. Kind of like the last year on Wall Street for example.

This translates to the largest counter party default in history. Booom!

Negative feed back loop as a six sigma event! One whole table of burnt out components, and a shorted out banking system.