Analogy of a Synthetic CDO
The Senate Committee on Homeland Security & Governmental Affairs held a hearing Tuesday, to investigate Wall Street and the financial crisis, with all witnesses from Goldman Sachs.
Many different analogies were used in trying to explain what a synthetic CDO is, comparing it, at times, as nothing more than chips in a “rigged casino.”
Senator Claire McCaskill, (D) Missouri, equated what Goldman did with these complex instruments to a betting-bookie analogy.
A better way to explain how a synthetic CDO works is to think of it in terms of fantasy football. You can choose a player as your reference obligation and your team earns points based on the player’s performance. You don’t own the player. You have no relationship to the player.
But you win and someone else loses if you’re betting in fantasy football depending on how your referenced players perform their games.
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