Banks best customers? Themselves!

Over the weekend, Umair Haque tweeted the following:

"I'm going to make you rich. You just have to be my bitch". A must read (esp for non wall streeters).

with a link to this article from ProPublica: Banks’ Self-Dealing Super-Charged Financial Crisis

The article is pretty shocking.  Here's the opening paragraphs:

They created fake demand.

A ProPublica analysis shows for the first time the extent to which banks
-- primarily Merrill Lynch, but also Citigroup, UBS and others --
bought their own products and cranked up an assembly line that otherwise
should have flagged.

The products they were buying and selling were at the heart of the 2008
meltdown -- collections of mortgage bonds known as collateralized debt
obligations, or CDOs.

As the housing boom began to slow in mid-2006, investors became skittish
about the riskier parts of those investments. So the banks created --
and ultimately provided most of the money for -- new CDOs."

In other words, as markets decided that CDOs were too risky, the bulge bracket broker-dealers dealt themselves some slack by using prop trading to buy and sell debt on their own books.

Don't believe it?

Here's the chart and explanation:

"In the last two years of the boom, CDOs created by one bank commonly
purchased slices of other CDOs created by the same bank. Market leader
Merrill Lynch outpaced its competitors. Nearly half of all of its CDOs
bought significant portions of other Merrill CDOs. (About Our Data)

The black circles below represent the number of deals in which banks'
CDOs held a significant portion of their own prior CDOs (more than
one-third of the overall CDO slices in the deal) while the colored
circles represent the total number of deals completed by that bank in
that half year."

Oh yes, and that quote from Umair?

One Merrill executive summed up the overall arrangement: "I'm going to make you rich. You just have to be my bitch."

Thanks to Sean Park for the retweet.