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CDO are not unsustainable. Liu should just be stating he doesn't like them, that's it. But they're not unsustainable by and of themselves. The reason institutions kept buying them is simply that they did not know what to do with the money that was raining on them (as the fed was minting so much... it's really a monetary spigot problem).

There is no pyramid to unravel in CDOs themselves, the pyramid is in housing. Just a debt-fueled asset bubble, and the repackaging makes it very hard to know who is hit (or hit worst, as everybody will be hurt eventually).

And it's not a subprime thing either. Supbrime just happens to be the first bubble to burst, but there is more than one bubble in the US today. Presently a large proportion of traded US corporate bonds are junk rated, and it's only the easy refi that kept them from defaulting. It will come next, in 2008, and it will be even bigger than subprime. And there will be CDOs too, and again, they are not the pyramid, they are just spaghetti on top of it ...

Pierre

by Pierre on Sun Aug 19th, 2007 at 02:09:55 PM EST
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