This is Anna Katherine Barnett-Hart.You might call her Michael Lewis’s muse.
Today she is an analyst at Morgan Stanley, according to LinkedIn.
What made Lewis so fond of the paper?
We read through it, and what’s great about it is the clear-eyed illustration of how the CDO market metastasized and turned into such an out-of-control monster.
If you’re still confused about this market, you don’t want to miss this.
CDOs also helped fuel the insane demand for yield needed to pay for so many worker's retirements and pensions et. al.
Over time they got riskier and riskier. In 2000, Home-equity loans made up 5% of CDO assets. That grew as high as 37%.
But even among subprime bonds, the ones packaged into CDOs did considerably worse, suggesting CDOs purposely pursued the riskiest assets.
And this is a fascinating point. For the first time, the ratings agencies came to be consumers of their own ratings, because CDOs were composed of other rated products.
Basically, by creating products based on their own ratings, the agencies became like snakes or dragons eating their own tail.
Through the magic of financial wizardry, initial CDO ratings (the red line) almost always had better ratings than the underlying (the blue bar)
Here were the top CDO underwriters by year. Merrill started slow, but really got into the game hard.
Surprise. JPMorgan wrote some of the worst CDOs, in terms of likelihood of defaulting. Goldman's really weren't that bad.
But in the end, says Barnett-Hart, her investigation led to more questions than answers. Here's her whole paper.
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