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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Jim McMannis who wrote (161142)11/2/2008 11:34:29 AM
From: RockyBalboaRead Replies (1) of 306849
 
Saxony teachers ... Wisconsin teachers. Everybody has been bilked; here is one sad account which highlights the risks inherent with Depfa and bond "investing"... (actually a lopsided bet which easily imploded; they borrowed 5 times their investment equity to write an option with a 100:1 leverage).

There is no other description suitable, those are the financial WMDs.

nytimes.com

>>> Soon, Whitefish Bay and the four other districts borrowed $165 million from Depfa and contributed $35 million of their own money to purchase three C.D.O.’s sold by the Royal Bank of Canada, which had a relationship with Mr. Noack’s company.

...

The schools’ $200 million was actually used as collateral for a complicated form of insurance guaranteeing about $20 billion of corporate bonds. That investment — known as a synthetic C.D.O. — committed the boards to paying off other bondholders if corporations failed to honor their debts.

If just 6 percent of the bonds insured went bad, the Wisconsin educators could lose all their money. If none of the bonds defaulted, the schools would receive about $1.8 million a year after paying off their own debt.

By comparison, the C.D.O.’s offered only a modestly better return than a $35 million investment in ultra-safe Treasury bonds, which would have paid about $1.5 million a year, with virtually no risk.
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