Cuniberti: Mixing the good with the bad
July 28, 2014
Don’t look now but the CDO or “collateralized debt obligation” is back. You remember those. Toxic mortgages not worth squat in the end, bundled up by our banking friends who made obscene commissions, bonuses and profits by selling them worldwide to pension plans, municipalities, states, investors, little old ladies and even entire countries.
Once the true value of those debt bundles became known and everybody starting selling all at once, the worldwide crisis started which almost blew up the entire global economy.
Of course, the Federal Reserve and your government were asleep at the proverbial switch while it was all going on and, of course, never admitted any blame but took the credit for kind of fixing it, and I mean “kind of,” because their so called “fix” was by making the banks whole again using your money to do it.
Never mind the fact the originators of all those packages (the banks) got to keep their bonuses, profits and commissions they made by concocting and selling them during the years leading up to the crisis.
Move along folks, nothing to see here. But hang on to your hats. The banks are at it again, packaging up loans and once again getting them rated AAA which enables them to pass off this garbage as the best of a quality investment.
It’s this mixing of junk with better loans that started the whole shebang a few years back which caused the banking crisis, and now it’s happening again but this time it’s not only with mortgage debt but debt of all sorts.
Automobile debt, company debt, student debt and “you-name-it debt” is getting packaged up and sold in those so called “tranches” again and you have to wonder just how short our memories are.
Investors are gobbling up literally billions of dollars worth of these packages to try and eke out some return in an otherwise zero interest rate environment.
An environment that is brought to us by those who are supposed to be watching this stuff: the central banks of the worlds and in the U.S. that means your Federal Reserve again.
The problem with zero interest rates (set by the Federal Reserve) is that it forces investors to look for yield, and that means buying into these bundles again much like they did with toxic mortgages.
By combining the good debt with the bad debt in these so called tranches, they can persuade those reliable credit agencies to once again rate the entire package AAA much like they did right before the last crisis.
So it’s a rerun again, except with different items on the menu but using the same old smoke and mirrors: package up junk and rate it AAA and sell it to someone else and rake in billions in profits.
And like before, it’s all happening under the not so watchful eye of the Federal Reserve whose artificially set low interest rates makes the whole thing possible.
Once this debt defaults in enough quantities to start bank balance sheets bleeding red, expect another round of bailouts to hit under the guise of maintaining a strong banking system and to ensure a functioning bond market.
Then once again you will be asked to pay for it all. Then the whole thing will probably start over as soon as our memories fade once again from the last time.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM at noon Thursdays and is syndicated on more than 30 radio stations throughout the U.S. His website is http://www.moneymanagementradio.com.