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Saturday, May 12, 2012

Mortgage Mayhem

What are the implications of this mayhem? They are all bad, especially for Mortgage Backed Securities (MBS), Credit Default Swaps (CDSes) and other collateralized debt obligation (CDO) derivatives. The band of fools in JPMorgan's Chief Investment Office (CIO) were buying up CDOs at the same time wiser heads in the banking world were avoiding them like proverbial hot potatoes. It is noteworthy that most of these derivatives were purchased after the 2008 credit crisis. In the greedy eyes of the JP Morgan derivatives trading staff, buying this paper after it had taken a 20% haircut appeared to be a bargain. To compound their problems, not only they take on CDS contracts, but they created additional hedges around those derivatives. This is like taking a bet on a bet. What a bunch of idiots!

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