Consultants made us build up in CDOs says ex-Citi official

If you think spending the time to understand complex instruments is too expensive, you should try ignorance. Even today it boggles my mind how so called senior managers still lack the understanding of the rudiments of these instruments .. just incredible!!!

My friend, they loaded up the institutions with the consent or knowledge of bankers, regulators, accountants, supervisory board, management board, press, public (some disclosure were wrong though)and finally and most importantly policy makers. I think no one of above can fingerpoint to anyone - who is the chicken or the egg?

Who knew they drank their own Kool-aid? The bankers and PMs who loaded up the institutions with all these positions with no real risk management still got paid and left others to clean up behind them.

"Sorry my friend" has it right! Those that loaded up on Super AAA CDOs of the RMBS variety did not have a clue about wat they were buying and did not perform the most basic sensitivity analysis. Like: what if Moody's (and S&P and Fitch) is wrong that the correlation factor is a lot higher than the 16%-17% they assign to a diversified pool of subprime and prime Baa rated tranches. And what happens if the underlying deal losses go to say 9% versus the expected 5%. Did no one ask those questions??

Sorry my friend, its only if you dont consider risk managing your books. Its not the product which is wrong, its the people not putting a single thought into building a proper risk management framework around it. In case you can not risk manage it or bear potential losses, you may not start taking the exposure. Its that simple.

The super senior tranche of CDOs and other structured credit positions really is "the story" of the downfall of AIG, Merrill, Citi, the monoline insurance companies, and others. There really should be a strong spotlight on what went wrong here for purposes of learning post-disaster lessons (for both practitioners and regulators). Likely mistakes are the misunderstanding of correlation in the deal models and the regulatory treatment.