How Banks Bet Against the Housing Market... and Won

'Synthetic CDOs' the most recent suspect financial instrument

Thursday, December 24, 2009

You might have heard of collateralized debt obligations (CDOs) and the role they played in the housing crisis, but have you heard of a 'synthetic CDO?'  Gretchen Morgensen and Louise Story report in today's New York Times, ("Banks Bundled Bad Debt, Bet Against It and Won,") on how banks used this special category of bundled debt to bet against the housing market, and win. Sometimes it meant the banks profited while their clients lost out.

Louise Story joins us to explain synthetic CDOs and the three government investigations that are already underway about the practice. The government wants to know if investment firms may have exacerbated the housing crisis as they tried to hedge their vulnerable mortage positions. We also speak with Sylvain Raynes, a structured finance consultant, to give us details on how firms used synthetic CDOs and how they pitched them to clients.

Guests:

Sylvain Raynes and Louise Story

Hosted by:

Todd Zwillich

Produced by:

Alex Goldmark

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