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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:

"Over the last two years of the housing bubble, Wall Street bankers
perpetrated one of the greatest episodes of self-dealing in financial

Faced with increasing difficulty in selling the mortgage-backed
securities that had been among their most lucrative products, the banks
hit on a solution that preserved their quarterly earnings and huge

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.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • John Magill

    Where the banks buying their own CDO’s or were they having to absorb the super-senior portion of the CDO as they couldn’t off-load it?

  • Chris Skinner

    Hi John
    For clarity, the banks were creating a daisy chain in the Mezzanine layer of CDOs, not the super-senior:
    “The top 80 percent, the less risky layers or so-called ‘super senior’, were held by the banks themselves. The beauty of owning that supposedly safe top portion was that it required hardly any money be held in reserve.
    “That left 20 percent, which the banks did not want to keep because it was riskier and required them to set aside reserves to cover any losses. Banks often sold the bottom, riskiest part to hedge funds.
    “That left the middle layer, known on Wall Street as the ‘mezzanine’, which was sold to new CDOs whose top 80 percent was ultimately owned by … the banks.”