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There was a pyramid scheme not because of the pyramid structuring of CDOs, which has nothing to do with Ponzi scheme, but because there may have been a bubble in CDO valuation ; Financial bubbles are when something is bought because of an expected increase in value may allow reselling at profit, and those may be described as Ponzi schemes.

The first link is wrong in its description of CDOs, BTW : the seniority of the upper tranches comes not because they are backed by safer securities, but because it is supposed they'll have to pay premiums only if all the backing debtors default, which is supposed to be very unlikely (and which may prove to be false in the case of subprime CDOs)

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Mon Aug 20th, 2007 at 05:39:33 AM EST
[ Parent ]
I do see a pyramid structuring of CDOs. I would not call it bubble - the CDOs were rarely traded. They were perhaps hardly tradable by design or expectation. As the last citation says,

"They were worth what the issuers said they were worth - until they tried to sell them."

by das monde on Mon Aug 20th, 2007 at 05:48:30 AM EST
[ Parent ]
The CDOs were traded ; that's how they were more effectively priced. Now that's there is not trust in CDOs, they can't be traded, and thus are losing their value.

A Ponzi scheme means essentially that you give the first entrants high returns with the money invested by later entrants ; this is not the scheme of CDOs at all : CDOs are insurance contracts.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Mon Aug 20th, 2007 at 06:05:31 AM EST
[ Parent ]
I clarified my use of Ponzi/pyramid terminology in a parallel sub-thread. I do not refer to CDOs as Ponzi.

The lack of  CDO trading was especially emphasised at the moment of BNP Paribas crisis. CDO valuation was anything but effective. Banks and hedge funds would have normally sold junk CDOs away, but they were scared reveal the real value of CDOs; and the real value of CDOs was opaque because they were rarely traded. That was the reasoning so shortly ago.

by das monde on Mon Aug 20th, 2007 at 06:34:41 AM EST
[ Parent ]
CDOs weren't a full-Ponzi, but there was more than a hint of Ponzi about them.

I'm guessing the first few iterations of the high-risk tranches would have posted impressive returns, and this would have been enough to persuade hedge funds to funnel money at them, starting a mini-Ponzi stampede, which would in turn have made CDOs as a whole look more attractive - especially with unrealistic risk ratings.

All it's going to take is proof that someone somewhere moved money from Tranche A to pay off a high return on Tranche B in the hope that money would come in to cover Tranche A at some point, sooner or later, and you have a classic Ponzi.

I'll be surprised if no one tried this.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Aug 20th, 2007 at 07:49:58 AM EST
[ Parent ]
Trading dried up because of the crisis a few weeks ago ; before that, although the market wasn't extremely liquid, trading happened regularly.

And the 'real value' of anything is given by the market, anyway, in our utilitarist world.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Mon Aug 20th, 2007 at 08:09:20 AM EST
[ Parent ]

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