Do you know what “synthetic CDO” is? I didn’t either. It’s a form of collateralized debt obligation (CDO) that invests in credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income assets according to Investopedia. And so now I still don’t know what a synthetic CDO is. What I get from the Investopedia article is that a synthetic CDO is a high-risk, high-payoff investment tool.
You could lose MORE than your original investment in a synthetic CDO if things go wrong. OUCH!
So what does that have to do with gambling? Well, this transcript of a PBS show compares synthetic CDOs to betting on the Super Bowl. In other words, mortgage investment strategists were betting that the housing market would never decline. That is how we got into the Great Housing Dump with the Great Recession.
All the bets on long-term growth turned out to be wrong.
That investment strategy was a kind of exotic bet like in NFl betting. Investors were not thinking in terms of “how much will this mortgage contract be worth in 5, 10, or 15 years” but rather in terms of the market just continually growing. But where were all the homeowners supposed to come from? Where was the job security they were supposed to have to keep up those obligations?
The investors should have bet on a recession happening, not perpetual growth. If you’re betting on the horses you have a better chance of predicting the outcome of the race than you do if you’re betting on the economy to always be growing.
It’s no wonder millions of people lost money on Wall Street. We were paying these guys to go out and gamble with our money. Why aren’t more of them in jail today?