Junk bonds to solid gold with a wave of a wand.

I’m not sure I could make this stuff up.

Over on Bloomberg, Morgan Stanley wants to take downgraded collateralized debt obligations (gambles they made and lost on), backed by leveraged loans (possible, in part, through capital injections by US taxpayers), and repackage the CDO into new securities with AAA ratings. Isn’t this how the financial crisis began in the first place? Taking incredibly risky assets (sub-prime mortgages) and repackaging them as AAA investments? The article notes, “Moody’s reduced the $365 million top-ranked portion of Greywolf in June by six levels to A3 from Aaa as the default rate on the loans in the CDO rose to 7 percent.” Seeing as Morgan Stanley is repackaging a Greywold CDO, this doesn’t speak well to me about a AAA rating.

What’s more worrying to me is that, “While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.” Defaults on US commercial property loans are climbing. How can you spin off two thirds of an offering as AAA even with the other third the second lowest ratings?!

In a somewhat related vein, Michael Lewis has an interesting piece on that looks into how A.I.G. Financial Products, one of the epicentres of the Great Recession, “whose financial ineptitude is widely suspected of costing the U.S. taxpayer $182.5 billion and counting”. It caught my attention because of the name Jake DeSantis, he of NYT resignation letter infamy.


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