Banks Excuse is They Relied on Rating Agencies for Investing in CDOs

Slap an AAA rating on any complex investment and make it too hard to understand in under 5 minutes and you have Bankers who should know better buying them by the wheel-barrow full. Saying they were triple A rated is their only requirement it seems.

The CDO might have started out as a smart way to distribute risk on a large number of smaller investments but once they started shovelling in sub prime mortgages and selling it as a triple A investment it was doomed. CDO factories were set up in Investment banks to create product as fast as they could it seems. So it was only a matter of time and the “greater fool theory” coming into operation to doom the great money-making machine.

Mum and Dad Banks should have known better but they were desperate to keep up with the Investment Banks that were making huge paper profits for their shareholders but mostly buckets of real money for their financial marketers and senior managers. They at least were paid real money every quarter so when the house of cards fell down they had their money in another bank safely squirreled away. A bank they no doubt checked out thoroughly.

So don’t tell us that Banks didn’t realise what was going on or that they took the AAA rating at face value. CDOs and Risk Management 101 should have Bankers asking the right questions and doing their own research. That’s what they are paid their exorbitantly high fees to do.

The problem was pure fear and greed of missing out on the great CDO gravy train, fear of losing investors and shareholders to their less risk-averse and fiduciary irresponsible competitors.

It must have been hard watching your competitor and maybe your neighbor driving a brand new top of the range Lexus and moving into a brand new architect designed home, then taking his family on a world tour, and all paid for with just his CDO Christmas bonus.

It must have been a no brainer too when your competitor told you how easy it was to package up a CDO, insure it, get an AAA rating and watch investors fight to buy it with you pocketing fat commissions and bonuses.

Investing in the stock market was yesterday’s business. (The S&P 500 has gone sideways for about 10 years.) Why do that when you can trade amongst yourselves off market where the average mug won’t see what is happening.

You know you should have read the prospectus, evaluated the risk, done due diligence, found out what comprised the CDO’s you wanted to purchase. All the things you tell us mugs to do before we invest in anything, you did not do. Shame on you.

But then maybe the plan was to buy the CDO’s and on-sell them to us mugs you call “clients” to our faces. Yes, that was your plan all along wasn’t it? But you just got caught with several billion dollars worth of CDO’s in stock that are now potentially worthless.

If you could have just hung on until this “minor world-wide credit clinch” was resolved with a FED buyout, all would have been well and it would have been business as usual. But it didn’t pan out that way.

So then you had to let the market know there was a “small problem” with some of your triple A rated investments. You just tested the market reaction with a “little” multi-billion dollar CDO write-down. It wasn’t too bad because other Banks were in much more trouble than you. That gave you three months to pray to your god that the credit crunch would disappear before your next market update.

All the while you are telling the market all is well, the bank is through the worst of it. Please, please can the credit problems disappear you keep saying to yourself. If you can just hang on until you get your annual bonus. But it gets worse and you realise you have to come clean.

Oops! You tell the market you found another much larger parcel of CDOs that were in the back office and was missed during the first CDO clean up. The staff have been severely reprimanded for not bringing it to your immediate attention. Sorry guys you say – it won’t happen again – honest. (until the next time).

This time you speak the truth because you are not there either when the next problem caused by the credit crunch hits your bank. You have fallen on your compensation package and left the bank with all the problems still to solve.

Just take a moment and think of all the families whose lives have been ruined by your irresponsible actions. Not just people you should never have given a loan to but honest, hardworking people who trusted you and paid their mortgages on time. You’ve just destroyed their wealth and maybe their family and their future. Do you feel any guilt what so ever? If people had been robbed of several thousand dollars on the street the robber would have gone to jail for 10 years or more.

We need all those bankers who knowingly participated in this scam to be purged and replaced with people who have ethics and standards and integrity. We need people to be bankers who will control and manage risk. Otherwise history will repeat itself again in a few years time, right in the middle of my retirement.

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