The CDO timebomb – how it works and why it could sink or save the world economy
Wednesday, 19 November 2008
.... 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.
As one part of the bank was furiously selling loans to these companies, another part was furiously selling insurance contracts against them defaulting, to unsuspecting investors who were actually a bit like “Lloyds names” – the 1500 or so individuals who back the London reinsurance giant.
Except in this case very few of the “names” knew what they were buying. And nobody has any idea how many were sold, or with what total face value.
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