Thursday, January 10, 2008

CDOs, SIVs and other structured finance instruments explained

Structured Finance Explained: (reposted from Jim Sinclair's www.jsmineset.com )

CIGA Rusty Bayonet offers the best explanation of SIVs that I have seen as of yet for the everyday reader.

Jack’s wealth is professionally invested
In a safe managed fund who collected the fees
That invested in a fund of funds that collected the fees
That bought an exotic and inexplicably high-yielding AAA-rated security with no questions asked
And then five more on credit
And then bought twenty-five more using the ones they bought on credit as collateral
That were issued by a structured investment vehicle
That was created to evade bank credit risk regulations
By the bank where Jack’s cash sits, insured by Jack’s taxes
That was owned by the securities dealer who collected the fees
That created the synthetic CDO
That was rated AAA by the ratings agency who collected the fees
Out of twenty credit default swaps written against the same single security
Whose default risk and value was derived from a model of the CDO-cubed
That bought the CDO-squared
That bought the CDO
That mixed together different kinds of extremely risky securities to magically remove risk
And whose collateral consisted of credit default swaps, interest rate swaps, and non-performing loans
Plus a little bit of that high-yielding junk-grade mortgage-backed security
The mortgage banker who collected the fees issued that
That funded the broker who collected the fees
That funded the huge mega mortgage with the teaser rate
That bought the land
That lay under the house
That Jack built

Now add to this the 13 characteristics of over the counter derivatives and you know you are dealing with items that are founded on larceny 101.

Click here for the 13 Characteristics of Over the Counter Derivatives scams.

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