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How to Make Fake Profits in the CDO Game

Gillian Tett has a good column on the super-senior game, in which she chastises banks for losing sums "larger than the gross domestic product of many countries" by entering into "a humongous, misplaced bet on a carry trade that was so simple that even a first-year economics student (or Financial Times journalist) could understand it". Super-senior tranches of CDOs, she explains, were zero risk weighted by dint of their triple-A credit rating, and the banks never stopped to ask why they yielded 10bp more than risk-free funds:

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