And Then the Roof Caved In

Chapter 7

The Securitization from Hell

 

 

 

Alan Greenspan: I’ve got some fairly heavy background in mathematics.

 

David Faber: I would think you’re one of the few people who might understand what a CDO really is.

 

Greenspan: But some of the complexities of some of the [financial] instruments that were going into CDOs bewilders me. I didn’t understand what they were doing or how they actually got the types of returns out of the mezzanines and the various tranches of the CDOs that they did. And I figured if I didn’t understand it and I had access to a couple hundred PhDs, how the rest of the world is going to understand it sort of bewildered me. But here I am observing all of these very sophisticated investors trying to buy more of this stuff than existed.

 

Faber: Yes, but this goes to my original point in my question to you. If Alan Greenspan can’t understand how they are getting to where they are getting on these particular structured products, then how are any of these investors supposed to understand?

 

Greenspan: Well, we learned the answer to that.They didn’t.

—TRANSCRIPT FROM AN INTERVIEW WITH ALAN GREENSPAN, SEPTEMBER 4, 2008

The collateralized debt obligation (CDO) may well go down in history as the worst thing anyone on Wall Street has ever thought up. But like so many other financial products invented by people who really liked math in school, the CDO was a harmless three-lettered security when it made its debut in 1987. That being said, it does seem fitting that the CDO ...