Dollars and Jens
Friday, August 27, 2010
CDO cross-holdings
ProPublica found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other’s unsold inventory. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers.ProPublica, þ Felix Salmon, who says $107 billion was 20% of the market for CDOs. I can imagine this being done for legitimate reasons, but that's not one's natural first bet. It reminds me a bit of the late eighties stock bubble in Japan, in which corporate profits (and the stock market) continued to rise for two years after operating profits peaked, just because of the extensive cross-holding of each other's shares by publicly traded companies. That latter example is more reminiscent than the newer one of an even older incident involving a fellow named Charles Ponzi.
