5 ms·
The difference is that these were synthetic CDOs so they didn't generate more demand for residential mortgage backed securities, rather they piggybacked off pre
by jamiequint 17y ago
The difference is that these were synthetic CDOs so they didn't generate more demand for residential mortgage backed securities, rather they piggybacked off pre-existing ones. This likely did nothing to expand the bubble.
- btilly 17y agoThey didn't directly generate more demand, but the existence of deals like this generated a market for the low quality bonds in deals, which made the hardest part of structuring those deals much easier. So no, it didn't directly expand the bubble. But this kind of activity indirectly did so. (Though this particular deal came late enough that the bubble was about to collapse anyways.)
- jamiequint 17y agoI'm not sure this is true. If the packagers of the non-synthetic CDOs realized no benefit from Synthetic CDOs being made off of theirs why would they have incentive to cater to the Synthetic CDO creators.
- btilly 17y agoThe market for synthetic CDOs like this only arose because the demand for low quality debt exceeded the available supply. Evidence that demand exceeds supply is encouragement to create more low quality debt. So no, it is not a direct connection. But it is indirect encouragement.
- jfager 17y agoI don't think that makes much sense. Consider a music analogy: samplers and sequencers didn't kill demand for new music. If anything, they spawned a whole new sub-industry dedicated to simply finding and selling new interesting snippets of sound.