It's All Fake

Credit-debt swaps. Collateralized Debt Obligations. I thought I had a partial grasp on this whole mess that sent most of the nation's largest financial institutions into bankruptcy. But the excellent Gretchen Morgensen, financial reporter for The New York Times, made her third or fourth appearance on Terry Gross's Fresh Air Nov. 13, and knocked me for a loop once again. She talked a lot about Synthetic CDOs - CDOs that are not based on bundled combinations of mortgages, but on bundled swaps and insurance policies written for mortgage CDOs. This explains why the taxpayer had to bail out AIG - it was an insurance company writing policies that were not used to ameliorate risk, but as fake assets that could be assembled into CDOs. By the end of the sub-prime craze, mortgage holders and external investors were betting on the futures of CDOs based on no assets whatsoever. Everything underlying the Synthetic CDO was entirely imaginary.

Gretchen had a few other important things to say. In 90 percent of the cases of consumers that took out sub-prime mortgages, the mortgages cannot be re-negotiated even if the government ordered the banks to do so, because no accurate record has been kept of the way they were sliced and diced into CDOs. Thus, no one knows who owns these mortgages, and how approval could be granted for re-negotiation. Also, she said that Paulson had little choice but to change the Troubled Asset Relief Program into a strategy for putting investment into banks, rather than in buying up bad loans. No one knew how to assign any sort of value to the toxic assets, thus the government had no idea what portion of the $700 billion to put into which mortgage packages. Well, at least the shift to investing in banks leaves the government with no philosophical reason for denying the same type of bailout to the Big Three in Detroit. Here's to Gretchen Morgensen, one of the few people on this planet who understands how completely and utterly fucked we are right now.