[Infowarrior] - When Financial Alchemy Fails

[Richard Forno]

(Really good, though long, article on the financial crisis.  Worth  
reading.  --rf)

When Financial Alchemy Fails
By Jill Drew
Washington Post Staff Writer
Tuesday, December 16, 2008; A1

It was Wall Street's version of an inside joke: Take a motley  
collection of largely unwanted assets, repackage them into a new set  
of bonds, and name it after the pristine white-sand beaches of an  
exclusive New Jersey town where Katharine Hepburn once summered.

No one is laughing now.

The Merrill Lynch bond deal known as Mantoloking has ended up with a  
different punch line: proof of the frenzied, foolhardy drive for  
upfront fees that helped bring down the world's financial markets and  
trigger the largest federal bailout in history.

Wall Street firms thought they had a surefire way to profit from the  
booming real estate market without much risk to their companies. They  
engaged in a kind of financial alchemy, creating a trillion-dollar  
chain of securities on the back of subprime mortgages and other loans,  
which were sold to investors in private offerings that no government  
regulator scrutinized.

With these deals, known as collateralized debt obligations, the world  
glimpsed the raw power of unchecked financial markets operating full- 
throttle to the point of self-destruction. The cascading losses on CDO  
bonds have undermined the solvency of several large banks and  
obliterated the trust that is the bedrock of all functioning markets.  
The debacle also has called into question the competence of Wall  
Street, the independence of bond-rating firms, the prudence of  
insurers and the foresight of regulators.

Deals like Mantoloking were "the height of lunacy," says Joshua  
Rosner, a bond market expert who issued multiple warnings about lax  
lending standards during the past seven years, earning him status as  
an early prophet of the credit crisis.

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http://www.washingtonpost.com/wp-dyn/content/article/2008/12/15/AR2008121503561.html?hpid=topnews