In a Blast from a Financial Crisis Past, Synthetic CDOs Are Back

CDOs helped to usher in the entire collapse of the economy in 2007. I find it hard to believe that the reemergence of these financial instruments which function largely in shadow banking are going to be a good thing long-term. It took several years for the previous CDOs to implode and did nothing but transfer monies from the middle class to those who could afford to bet on CDOs. If the same happens again, more will lose their retirements and the middle class will shrink even more.

More oversight may have been put in place but banks created instruments that were not regulated before and nothing will prevent them from creating more instruments that fall outside of the regulators reach. Finally, when you create instruments that bet on the dbt default, you are likely to achieve just that......default in large numbers. Without the success of CDOs the banks could not sell them and for them to be succesful, people must be defaulting on debt. It has been said that the next financial crisis will come from the higher incidence of default from car loans and from the burgeoning student loan default rates.

In my opinion, the increase interest and investment in CDOs spells economic trouble for all of us.