Wednesday, December 05, 2007

Blatant cover-up

Earlier this year, for example, Merrill Lynch, Citigroup and Bank of America gave almost no indication that one particularly toxic debt product -- CDOs, or collateralized debt obligations -- could be the source of billions of dollars in losses. The major banks have already reported billions in unexpected losses from complex investment vehicles known as CDOs. Now they face big risks from other corners of the debt markets -- but don't expect them to warn investors anytime soon.

One likely new trouble spot: Conduits, the opaque structures banks set up to provide debt funding to borrowers. Often, the debt issued by the conduits is collateralized with assets, like mortgages. If the borrower fails to pay up, it’s the bank’s obligation to pay the bondholder.

Conduits typically aren't consolidated on a bank's balance sheet. But banks are often on the hook to fund them if investors stop buying the debt they've issued. When that happens, a lot of risk can get moved onto the balance sheet.

How well do you know your bank, as an investor? Learn about some blatant cover-up here.

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