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Strategies & Market Trends : John Pitera's Market Laboratory
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To: robert b furman who wrote (8539)12/11/2007 10:42:44 AM
From: Hawkmoon  Read Replies (2) of 33421
 
Does any know how these products could be leveraged?

I maybe incorrect, or simplistic, but I believe that the CDO/CMOs bonds were treated just like any other bond instrument for the purpose of creating leverage.

They purchase bonds on credit, often from locations where they can borrow money for less than the yield of the bond (Japan.. etc). The banks accepted the bonds as being valid collateral against the loan.

So, in the case of mortgage backed securities, the collateral effectively became illiquid, if not worthless. That puts many of those hedgies and SIVs on the hook for billions of dollars in loans against assets which have indeterminant value.

I'm sure John and a few others can expand upon this..

But I also agree that, contrary to the S&L crisis, this one has global implications. But since that risk was so diversified, and not contained strictly to the US banking system, its created global bagholders..

Hawk
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