WSJ Number of the Week: $132 Billion of Lost Synthetic Mortgage BetsMay 1 (The Wall Street Journal) -- As the Securities and Exchange Commission and Goldman Sachs head toward their day in court, it’s high time to take a look at how deals like the one at the center of the case — a synthetic mezzanine ABS CDO called Abacus 2007-AC1 — helped turn the U.S. housing bust into a global economic disaster.
The names of the deals serve only to obscure their true nature, so we’ll just call them a betting game. This game allowed investors — including banks and insurance companies such as UBS, Merrill Lynch, AIG and Germany’s IKB — to make huge side bets on the performance of subprime borrowers, dramatically increasing the amount of money that would have to change hands if things went wrong.
The names of the deals serve only to obscure their true nature, so we’ll just call them a betting game. This game allowed investors — including banks and insurance companies such as UBS, Merrill Lynch, AIG and Germany’s IKB — to make huge side bets on the performance of subprime borrowers, dramatically increasing the amount of money that would have to change hands if things went wrong.