Written by Biloxi
I saw The Big Short movie and the movie was not only a must see movie but a great education to the 2008 financial crisis and an clear eye opener to another rebirth of synthetic CDOs or Collateralized Debt Obligation. For those who are going to see the movie, check out the end of the movie about the rebirth of the CDOs. From Wikipedia:
The film calls these “bespoke opportunity tranches,” though in reality they are also sometimes referred to as a “Bespoke CDO” or “Single-tranche CDO.”
So what is Bespoke Opportunity CDO?
Single-tranche CDO or Bespoke CDO is an extension of full capital structure synthetic CDO deals, which are a form of collateralized debt obligation. These are bespoke transactions where the bank and the investor work closely to achieve a specific target.
Typically the objective is to create a debt instrument where the return is significantly higher than comparably rated bonds.
Remember, no one person, hedge fund, nor bank has gone to jail for CDOs.
Bottom line, has anything changed since the 2008 financial crisis? Nope. Here is why.:
a. Liars loans are back:
(Reuters) – Mortgage applicants who can’t provide tax returns or pay stubs to show their income are getting stated income loans again as companies such as Unity West Lending and Westport Mortgage chase customers they can no longer afford to ignore.
b. Liar loans are sneaking back into AAA rated bonds:
Years after the great American housing bust, mortgages akin to the so-called liar loans — which were made without verifying people’s finances — are creeping back into the market. And, like last time, they’re spreading risks far and wide via Wall Street.
Today’s versions bear only passing resemblance to the ones that proliferated in the mid-2000s, and they’re by no means as widespread. Still, they reflect how the business isstarting to join in the frenzy that’s been creating booms in everything from subprime car loans to junk-rated company bonds.
c. Government mortgage giant sold off $1.1 billion in non-performing loans:
Freddie Mac announced that it sold off 5,311 seriously delinquent loans from its investment portfolio. The loans carry an unpaid principal balance of approximately $1.1 billion.
d. And yes, the big banks are involved in the new rebirth of the CDOs:
Not surprisingly, investor interest has been piqued, and around $20 billion of bespoke tranche deals were printed last year, according to banker estimates; tiny compared with the market’s peak, but enough for dealers to start rehiring and printing research.
Banks involved include Citi – a lead player in the revival – Morgan Stanley, Goldman Sachs, BNP Paribas and Société Générale.
Interesting enough in Robert Kiyosaki’s book, Rich Dad’s Prophecy, he predicted the biggest market crash would come in 2016. Will shall see if history repeats itself. And from rebirth of liar loans, rebirth of putting liar loans into AAA bonds to be packaged, the selling off of crappy loans to other investors and nonbanks, and new rebirth of CDOs, sounds like Kiyosaki’s prediction is right on track.