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Greenspan: CDOs Too Complex for Investors... (fraud by Complexity)

Posted on the 01 November 2011 by Wallstlawblog @Wallstlawblog

-Introduction

IS IT REASONABLE TO BELIEVE WALL STREET USED COMPLEXITY TO FOOL SOPHISTICATED ABOUT THE QUALITY OF BONDS BACKED BY NONCONFORMING MORTGAGES DURING THE HOUSING BUBBLE ERA?

In a word - ABSOLUTELY.


Indeed, there was so much comlexity in the various methods Wall Street used to package and repackage mortgage bonds in the 2000s that it was nearly impossible for anyone but the big banks that engineered and sold the junk products (and pretended they were ultra-safe) to know the truth about risk. And the truth was that these products were extremely risky.


- A Mystery To the Maestro


Why do we say this? Well, in September 2008 CNBC's David Faber interviewed Alan Greenspan. Faber asked the former Fed Chairman about the complexity of mezzanine CDOs.

In the view of Wall Street Law Blog, Faber's questions and Greenspan's answers say all that needs to be said about how complex these products really were.

September 4, 2008


David Faber:

I would think you're one of the few people who might understand what a CDO really is...

Alan Greenspan:

But some of the complexities of some of the instruments that were going into CDOs bewilders me.


***I didn't understand what [the banks that produced CDOs] were doing or how they actually got the types of returns out of the mezzanines and the various tranches of the CDOs that they did.***


And I figured if I didn't understand it -- and I had access to a couple hundred PhDs -- how the rest of the world is going to understand it sort of bewildered me.


But here I am observing all of these very sophisticated investors trying to buy more of this stuff than existed.


David Faber:


Yes, but this goes to my original point in my question to you-


If Alan Greenspan can't understand how they are getting to where they are getting on these particular structured products, then how are any of these investors supposed to understand?

Alan Greenspan:

Well, we learned the answer to that. THEY DIDN'T.


By Brett Sherman, The Sherman Law Firm


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