Blame Wall Street’s phantom bonds for the credit crisis

This is completely insane. Apparently bonds can be sold that do not exist.

Because the financial regulators do not require that the actual bonds be delivered to the buyer, your broker credits you with an electronic IOU for them, and, eventually, with the interest payments as well. But the so-called “bonds” that you receive as an electronic IOU, called an “entitlement”, are phantoms: there aren’t any bonds delivered by your broker to you, or by the government to your broker,or by anyone.

The significant result of the IOU system is that brokers are able to sell many more bonds than the Congress has authorized.

Phantom Credit Default Swaps also exist too, and there are $9 of those for every $1 in mortgage bonds.

There are trillions of dollars of these fictitious financial instruments out there.

Who stands to gain? There is no transparency for CDS trades, which means that we don’t know who these buyers are. But in order to get paid on these CDS, the buyer must be a DTCC Participant… and that brings us to Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley – all Participants at DTCC [Depository Trust & Clearing Corporation] and instrumental in designing and developing CDS trading around the world.

Any questions?

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