The financial engineers on Wall Street are back at it again. Apparently nothing was learned from 2008. The Wall Street Journal reports:
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 JPM -1.90%& Co. and Morgan Stanley MS -1.73%bankers in London are moving to assemble so-called synthetic collateralized debt obligations.
CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.
Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice.
While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments.
