Ivy takes on the Beast of Topics:
Collateralized Debt Obligations
RINGMASTER steps up and puts on ringmaster hat.
RINGMASTER
Now…. The Circus of Finance takes on the Beast of Topics: Collateralized Debt Obligations… to help us understand the mortgage crisis.
(Signaling drumroll)
Watch as Ivy takes on CDO’s , an act never successfully performed.
(Offering Ivy a stool or taming rod).
You’ll need this.
(Aside to the audience.)
It’s a beast.
Ivy accepts stool or taming rod from RINGMASTER.
Participants mumble. Will she be able to do it?/You need an MBA for this stuff. Nah….
RINGMASTER
IVY
I told you it’s too much. I need reinforcement. And even then… I’m pretty sure I’ll fail.
IVY, trembling, steps onto a podium with a stool or taming rod in hand and prepares to explain the mortgage crisis.
We’ve all heard of the bailout? You couldn’t have missed it.
(A growl. IVY positions herself to repel an invisible beast.)
Well, how about CDO’s- collateralized debt obligations-
(Another growl. IVY I grips the whip with terror.)
I know… but please try. That’s the financial instrument at the heart of the mortgage crisis. Well, along with lack of regulatory oversight.
Upon the growls from participants, Ivy throws down the whip or taming rod.
IVY
Look, I’m trying. To understand it, it’s not just here kitty kitty. I have to talk about what a CDO is…, and to grapple with that you have to know what a derivative is. Do we…? Know?
(Audience/participants’ growls).
So, a derivative…
Okay, okay! A CDO, or collateralized debt obligation is a particular type of derivative, meaning its value is derived from another underlying asset. These assets- like your home become the collateral if the loan defaults.
Good. You got it.
IVY stands up straighter, gaining confidence.
IVY
So…, the C in the ‘CDO’ is collateral- you know that’s the bank holding onto something in case it doesn’t get repaid for what is owed. The D in the CDO is debt. You know about that- your home that isn’t yours. And the O in the ‘CDO’ is obligation. We all know about that. Life.
But here’s where it gets interesting. Real estate is a casino. It’s not just you and the bank. It’s you and the bank and investors who are betting on your ability to pay the loan. So Investors made a financial instrument-
(Backing up as she hears growls.)
Uh, sorry, uh… yeah. Instrument- you know a kind of tool to make investors wealthy.. A CDO is a financial instrument that works kind of like a sausage-grinder where you package different people’s loans together. You know, there are different ‘cuts.’ They call them tranches, literally ‘cut.’
(Cowering as she hears growls.)
IVY
Okay. So you have different cuts. There are the iffy bets: people who probably won’t be able to manage the loan are one cut, or tranche. You know, B-grade. And the more certain bets are the home owners who are likely going to be able to pay are in another tranche. A grade… like different grades of meat all stuffed and secured into a package, like a sausage.
But during the mortgage crisis no one actually really looked at what’s in there. And they just sold those robo loans to everyone. Boom! That is some rotten sausage. And lots of failed bets by investment banks.
RINGMASTER
Extraordinary! Ivy has gotten a start at taming the beast of topics. Let’s show some appreciation!