Crisis of CDOs

9/25/08

I am going to write the following article which also going to post in local chinese newspaper this friday.
CDOs, Collateralized Debt Obligation is a special investment vehicle which packed by different kind of bonds, mortgages, and other class of assets. It has vary tier and rating but has less flexsability to trade around. One the banking hearing committee, one Wall street investment banking firm executive expressed " The current form of rescue package is like throwing a rock into big ocean". What make him saying this? It is the potential crisis of CDOs.
From my research, there are about over $80 Trillions CDOs stored in all large world banks and financial institutions. Merrill Lynch once had about $11 Billions of CDOs, but less than 2 weeks, it marked down 40% the CDOs asset. Afterward, Merrill Lynch has successfully sold large scale of the CDOs into market. However, the value of sale is only 22% of the original cost. It is a loss of 78% reckless investment. Now, do anyone seeing the problem??
If the total value of CDOs adjust downward to barely 10% not like Merrill Lynch the lost of 78%, the whole banking firms have to suffer 8 Trillion loss. But, the crisis of CDOs still has not reaching the critical time. It will be expired to recall about 2 years later. All the financial institutions still have time to unload these huge toxic assets out of their books. But, I am wondering how they going to do so with such credit crunch time in progress and who would buy these garbage from them? Anyway, no one knows what would be the outcome.
Questions: How 700 Billions rescue plan would bring back alive the financial system and help the amazing 80 Trillions of CDOs of those financial firms??
My Answer: It will not. 700 Billions is nothing to help, it has only delay the time America getting into the greatest depression of all time. Be well prepared yourself into this crisis.