CDO destruction would save banks, unfreeze credit markets, and destroy investors worldwide

November 25, 2008

seangw

Corporate, European, Finance, Government, International, Personal, Private Sector

Alan Kohler, of Business Spectator, wrote an article A tsunami of hope or terror?. The article covers what will happen if more companies go under.

The Breakdown:

A synthetic CDO cataclysm could save the global banking system (with horrible consequences)
Investors and funds worldwide will be collateral damage
Banks paid external entities (usually Cayman companies, or charities) to back investments
Contracts required investors to pay back 100% of investment, if 9 of the companies defaulted
The companies were some of the most highly leveraged in the world
Banks knew what they were doing, deceiving investors, and hedging their bets
Companies on the list: Icelandic banks (3 have defaulted), Countrywide, Lehman, Bear Stearns, AIG, Freddie Mac, Fannie Mae, Ambac, MBIA, PMI, General Motors, Ford, and a lot of US home builders
After enough companies fail, massive amounts of money come flowing back into the banks. From the investors who bought the story.

Does that sound like a winning list of companies? On almost a daily basis, we hear about these companies and their pending failures.

What does this mean? Well, when enough of those companies fail, enough to trigger the contract, tons of money will come flowing back out of the investors into the banking system.

The net effect, is the credit freeze will be undone … while the world will be standing with their mouths open, wondering where their investments have gone.

No wonder Citigroup wanted money instead of the Big 3.

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