WEALTH – What does it Take to make it and hang on to it.

WEALTH – What does it Take to make it and hang on to it.

Reuters Drops a Bombshell: The Big Short Doomsday Machine Is Back

By Pam Martens and Russ Martens: April 29, 2019 ~


In what can only be described as a new low in defining deviancy down on Wall Street, Thomson Reuters’ International Financing Review (IFR) reported this past weekend that some of the biggest names on Wall Street have returned to creating and/or trading synthetic collateralized debt obligations (Synthetic CDOs).

The products were a major factor in bringing the U.S. financial system to the brink of failure in 2008. Synthetic CDOs also resulted in hundreds of millions of dollars in fines and reputational damage to these same Wall Street behemoths as investigators found that the firms were allowing hedge funds to pick “crap” subprime mortgage bonds to stuff in the CDOs in order to make windfall profits for the hedge fund, which shorted (bet against) the CDOs. The Wall Street firms had full knowledge of what the hedge funds were doing but, nonetheless, peddled the investments as sound to unsuspecting investors. In some instances, the same Wall Street firm that was selling the product as a good investment to public pension funds, school districts, churches and insurance companies, was also making short bets itself against the CDO. In at least one case involving Goldman Sachs, it placed a 10 to 1 short bet on failure of its own product.

Writing for IFR, Christopher Whittall reports that “Trading volumes in synthetic collateralised debt obligations linked to credit indexes are up 40% this year, according to JP Morgan, after topping US$200bn in 2018 on the back of three years of double-digit growth. Meanwhile, analysts predict more than US$100bn in sales of bespoke synthetic CDOs in 2019 following an estimated US$80bn of issuance last year.”

Who are the major players in this market? According to Whittall, Citigroup is a major player while Deutsche Bank has “an eye on expanding in this market.” Our own sources tell us that Morgan Stanley has also structured deals in the past two years.

The bombshell here is not about the trading of synthetic CDOs. Firms can do that all day long without exposing their balance sheets and the U.S. economy to collapse. The bombshell is that the bespoke (custom-made) synthetic CDO market has returned to Wall Street and if analysts are predicting $100 billion this year after an estimated $80 billion last year, that means the real secret number is dramatically higher. Those figures also reveal nothing about how much shorting is going on. That could be 10 to 1 or even 20 to 1.

Instead of subprime mortgages being targeted this time around, what’s being stuffed into these bespoke products is corporate debt – which has exploded over the past decade, in no small part because publicly-traded corporations and Wall Street banks are being allowed to prop up their share prices through stock buybacks financed with debt.

The second bombshell in Whittall’s article is that one of the most suspect banks on the planet, Citigroup, is re-engaging in this market. Citigroup’s off-balance sheet CDOs and the secret puts it had written on them played a major role in blowing up the global bank in 2008 after Sandy Weill had walked away as a billionaire in 2006 and Robert Rubin, the former Treasury Secretary, had raked in over $120 million in compensation.

Citigroup received the largest taxpayer bailout in U.S. history from 2007 to 2010 to prevent it from bringing down the rest of the street. The bank was interconnected, through derivatives and loans, to almost every major player on Wall Street as well as global foreign banks. If it went bust, it was going to take down a lot of other key players with it.

What the public was allowed to know at the time of Citigroup’s bailout was that it received $45 billion in equity infusions from TARP – the Troubled Asset Relief Program approved by Congress; a guarantee of over $300 billion from the Federal government for its dodgy assets; a guarantee of $5.75 billion on its senior unsecured debt and $26 billion on its commercial paper and interbank deposits from the Federal Deposit Insurance Corporation. What the public was not allowed to hear about at the time was $2.5 trillion in revolving, low-interest-rate loans pumped into the insolvent behemoth by the Federal Reserve, in violation of the Fed’s mandate to only lend to solvent institutions. These details did not fully emerge until the Government Accountability Office released its audit of the Fed’s secret lending programs in July of 2011.

That Citigroup has now returned to these products is nothing short of breathtaking in its brazen contempt for the sensibilities of the American people. It is also an indictment against every Federal regulator of Wall Street. As recently as May of 2015, Citigroup became a felon by admitting to charges brought by the U.S. Department of Justice over its role in rigging foreign exchange trading. Other banks were charged as well. (See A Private Citizen Would Be in Prison If He Had Citigroup’s Rap Sheet.)

To help movie audiences understand CDOs, The Big Short movie of 2015 put the blond, sexy Australian actress Margot Robbie in a bubble bath with a glass of champagne to explain the subprime “sh*t” that was stuffed into CDOs. To unravel the intentionally convoluted synthetic CDO, the movie offered up pop star Selena Gomez in a low-cut dress at a blackjack table along with the behavioral economics expert, Dr. Richard Thayer.

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About 108,000 millionaires migrated across borders last year, a 14 percent increase from the prior year, and more than double the level in 2013, according to Johannesburg-based New World Wealth. Australia, U.S. and Canada are the top destinations, according to the research firm, while China and Russia are the biggest losers. The U.K. saw around 3,000 millionaires depart last year with Brexit and taxation cited as possible reasons.

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