Goldman Sachs: Collateral Debt Obligation

In 2006, the Housing rates shot up and taking out mortgages seemed like a fair option. What the market did not apprehend was the drastic fall in its prices, almost subsequently, an year later, leading to the worst ever bankruptcy situation that sent many leading investment firms like the Lehman Brothers plummeting towards a financial depression and sped their end. Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester all came within a whisker of doing so and had to be rescued . One of these firms, namely Goldman Sachs, under Lloyd Blankfein, survived the mess. It not only survived but recorded its highest profit in that particular year. How?

Goldman Sachs – The

It stands for ‘Collateral Debt Obligation’ and stands as an asset that can be sold off by banks to gain security against the failure of payment. Basically, in the backdrop of increasing loaning on mortgages, the banks decided to create a derivative in the form of selling CDOs to investors, who have interest in buying these CDOs, in order to amass the payment and interest from the mortgagees. These securities are rated by credit rating agencies. The investors depend upon these ratings to purchase securities on prime mortgages. CDOs can be made up of any type of debt, in the form of bonds or loans.” These obligations are then divided into slices that contain debts with various levels of risk. These different slices of risk are referred to as “tranches.” Every tranche has its own credit

• Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.

• Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.

• Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman