How to keep a bubble expanding? That was an issue faced by the top Wall Street banks as the mortgage-driven derivatives boom started to crest. By then, the savviest buyers domestically had wised up to product push, and the most fertile buyers for a lot of iffy deals were overseas, in Asia and in Europe.

But banks were also forced to eat a lot of their own dog food, so to speak, notes ProPublica in a lengthy takeout. The likes of Merrill Lynch, Citigroup, UBS and others ended up buying up the most toxic tranches of various CDO deals, to keep the market humming, essentially creating CDO to invest in other CDOs (CDO news).

In fact, "in the last years of the boom, CDO had become the dominant purchaser of key, risky parts of other CDOs largely replacing real investors like pension funds," reports ProPublica. "By 2007, 67 percent of those slices were bought by other CDOs--these were known as CDO squared--up from 36 percent just three years earlier. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs."

ProPublica also concludes that many of the deals involved third-party managers to actually the manage the CFO portfolios, but these managers ended up beholden to the banks--shades of the SEC allegations against Goldman Sachs. This is not necessarily new stuff to regulators. But I still think we'll see some sort of global settlement of practices that were rife across the major players. There are signs something is in the works.

For more:
- here's the article

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