Posted on Monday, November 22, 2010
If you're in the market for a detailed, if byzantine, explanation of how banks ended up repackaging and buying their own own securities during the housing boom, we've got you covered.
This infographic, courtesy of MortgageRates lays out some of the details unearthed in a sweeping ProPublica investigation in August. To boost demand for complex mortgage securities called "collateralized debt obligations" (CDOs) some banks resorted to selling these same deals to their own company. (Hat tip to Felix Salmon.)
The technique worked something like this, according to Jake Bernstein and Jesse Eisinger of ProPublica:
"In analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs."