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Troubling Return of Credit Bubble Factors like CDOs

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The Article: the Troubling Return of Credit Bubble Factors like CDOs from the Business Week

  1. The news article called “The Troubling Return of Credit Bubble Factors like CDOs” majorly involves the banking industry. By extension, the public, who bank with the specific banking institutions are also involved. Specifically, the article mentions Citigroup and JPMorgan. Also mentioned are the Federal Reserve Governor, Daniel Tarullo, the Dallas Fed President, Richard Fisher, and two senators; Sherrod Brown and David Vitter. The moral issue in the case is the fact that banks have started selling or engaged in the re-introduction of the Collateralized Debt Obligations or CDOs, which were a major contributor or player to the credit bubble and financial crisis of 2006. CDOs are simply a promise to pay cash flows to investors based on how much the CDO collects from the assets it owns. The payments are made in as per a preset sequence and as such, if they collect insufficiently (as they have time and time again), the investors in the lower levels, which are usually the majority, will be the losers.
  2. This is a moral issue and a wrong because the banks have the knowledge that the CDOs, especially backed by the mortgages as they are this time too, are too risky and will most probably fail again. As Neil Barofsky would refer to it in his book; Bailout, “History is repeating itself on a minor scale.” The moral wrong is that while many people lost their money, assets and majorly, homes in the previous financial crisis, the banks actually profited from it. The banks approached the issue with an “arrogant notion” of being “Too big to fail” and they are doing the same thing this time too. From historical trends I am inclined to agree with Barofsky that “there is little reason to think that (these instruments) are going to be significantly better this time round”
  3. The financial instrument is only wrong because it puts all the pressure on the public while benefiting the big banking corporations. In response to the previous incidents of the same nature where the government finally bailed out the institutions while the general public suffered the loses, an appropriate measure to be taken would be to ensure that the general public are the cushioned lot while the multi-billion corporate who think they are “too big to fail” would be stipulated to ensure they have sufficient strategies and fall back positions, for their own sake. The Senators, Brown and Vitter, among others, also agree that the big banks should be tethered to save the public. Specifically, Senator Elizabeth Warren, says that “too big to fail” needs to end and that the big bank subsidies by the government makes no sense.

 

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