CDOs and Mel Brooks

Huffington Post's David Fiderer, who has written detailed, well-researched posts on the events that led to the September/October 2008 financial near-meltdown, tells us that CDOs that may have helped crash the housing market which in turn crashed the financial markets which then crashed the global economy has a lot in common with Mel Brooks' classic - "Springtime for Hitler", a play within a play.

What's the common thread here? Both were designed to fail. ("Springtime for Hitler" succeeded, much to the chagrin of the producers. So they had to bomb the theater.)

Do Business Schools See Why CDOs Are Compared to "Springtime for Hitler"? (David Fiderer, 4/12/2010 Huffington Post)

"The Magnetar Trade was taught in the best business schools long before This American Life likened it to "Springtime for Hitler."

"For those unfamiliar with the fraudulent scheme portrayed in Mel Brooks' classic movie and Broadway musical, The Producers, "Springtime for Hitler" was an enterprise specifically designed to fail. It was a play thought to be so insipidly tasteless that it would close on opening night, so the investors, who laid out cash far in excess of the play's actual production costs, would never question where all the money went.

"New reporting in ProPublica offers hard evidence that Magnetar, a hedge fund group based in Chicago, had designed a series of subprime mezzanine CDOs that were all but guaranteed to fail. Magnetar made a bundle by doubling down on bets that its own CDOs, and similar financial instruments, would fail. This idea was not unique to Magnetar. Hedge fund manager John Paulson pursued the exact same investment strategy. The Magnetar story was first reported in the Wall Street Journal back on January 14, 2008, one day before John Paulson put Alan Greenspan on his payroll." [The article continues.]

So what's the big deal? John Paulson did it. Goldman Sachs did it. Why can't they?

The big deal to me is that this story has had hardly any traction in the mainstream media. That these big-shot bankers and fund managers deliberately created financial vehicles that had no intrinsic value for the express purpose of letting them fail. Or worse, making it sure they fail so they could profit. In the process, they at least aggravated the collapse of the housing market if not downright triggered it.

Now, many of the same savvy fund managers have bought up distressed mortgage-backed securities on the cheap, the same securities that they helped tank in price. They are waiting, for now. You can bet they are not waiting for the turnaround of the housing market. They are waiting for the federal government to make them "whole".

The federal government is beyond broke at this point. (See the debt clock on the upper left corner of this blog.) Who's going to pay to make rich investors and fund managers "whole"? Taxpayers, including those distressed homeowners who will be losing their homes.

It's such a comedy, if you are not party to it. Outdoing even Mel Brooks.

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