Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.Again! Full story here (registration required). Article is titled "One of Wall Street's Riskiest Bets Returns."
In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, J.P. Morgan Chase & Co. and Morgan Stanley bankers in London are moving to assemble so-called synthetic collateralized debt obligations.
This reminds me of a passage in Charles Kindleberger's excellent book, Manias, Panics, and Crashes: A History of Financial Crises, which first came out in 1978. (Just another light summer read.) He writes,
The paradox is equivalent to the prisoner's dilemma. Central banks should act one way (lending freely) to halt the panic, but another (leaving the market to its own devices) to improve the chances of preventing future panics. Actuality inevitably dominates contingency. Today wins over tomorrow. (Fourth edition, p. 164)Unfortunately, all medicine, even necessary medicine, has side effects. I do not envy the decisions that the Federal Reserve is faced with making, but with junk bond yields near record lows and CDOs returning, the sooner we can end q.e. and ultra-low interest rates, the better.
