CDOs Are Dying, and That's a Good Thing

"Trading in CDOs Slows to a Trickle."

Yep, we are starting to see these stories, and they are being portrayed as some really negative stories, as if Wall Street can't survive without them and the brokers are going to be crushed because of this.

Ha!

This was a crummy business predicated, in the end, with bogus mortgages being pooled with financial insurance to dress them up to look better.

We have always pooled mortgages, but they tended to be issued by Fannie Mae (FNM - commentary - Cramer's Take) with some guarantees behind them. Then the business got taken over by a lot of fly-by-night originators who took advantage of an overheated housing market and sent the mortgages to be pooled by Wall Street in "tranches" that were meant to be safer when wrapped with insurance. The stuff was dense, unanalyzable in a declining house price environment where the risks became default -- called credit risk -- NOT prepayment- or interest-rate-oriented.

Cramer: Washington, Can You Hear Me?

That business should be shut down. It turns out to be dangerous stuff, far more risky than anyone thought. So why keep doing it?

During every period, there's something that doesn't work. I have seen equities be a dead-weight loss and that division was slimmed down dramatically on Wall Street. I have seen municipals be decimated at times. Then junk bonds. Then tech. It comes and goes.

This is not even a big division at many of these firms, although it was exceptionally lucrative. Same with private equity, which is simply lurking and will come back when the backlog of bad deals gets through the pipeline and then defaults. The stuff is simply junk bonds in the end, and the junk bond market is cyclical.

The only difference is that CDOs are in secular decline. The customers can't afford to buy them any more, the fiduciaries have woken up.

Remember how most of this stuff happened: the salespeople made so much money selling structured product (code name for "difficult to analyze and price" so therefore capable of jamming a huge fee on each piece sold) that they could afford to really hurt clients and then retire before it bit them in the butt.

That's highly unusual. Almost no product was EVER this lucrative.

It is gone. It pumped up earnings. But the Street always knew this would happen, which is why the stocks sell at half the market multiple. More reasonable income streams going forward are already in the stocks. Doesn't mean they won't continue to be discounted.

It does mean there is no news in CDOs going away.

Random musings: Welcome to Vince Farrell, whose blog I have been reading for some time and is brilliant, insightful, actionable and incredibly well written with a wry eye to the market. Plus I love the quirks! The Web was made for Vince. Welcome aboard! ... Speaking of welcome aboard -- Welcome back to Chevron (CVX - commentary - Cramer's Take), the worst-performing oil, and Bank of America TBAC, among the worst-performing financials. Two bad ones, and we lose two upward stocks, Honeywell (HON - commentary - Cramer's Take) and Altria (MO - commentary - Cramer's Take). The latter can't be avoided because of the coming split. I will miss HON, which is totally reliable.

At the time of publication, Cramer was long Altria.

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