FTAlphavilleFT Alphaville is a 2008 Webby Award Winner

• News
• Markets Live

Suntans are peeling fast as most bankers furiously search their floppies for that memo from the summer of ‘03 that came on cold for the US mortgage market.

Most, but not all.

Indeed, you will be forgiven for not knowing that the current credit crisis could be the work of an evil cabal. Or so it seems from an article in Barron’s, which sources an anonymous “bearish hedge-fund operator” who, in turn, has been talking to an equally anonymous “senior Wall Street marketing director.”

Barron’s has obtained a letter sent by the ‘bhfo’ to his/her investors revealing:

This will go down as one of the biggest financial illusions the world has EVER seen.

FT Alphaville notes that the master plan involves the “alchemy of CDOs” in a ritual overseen by the ratings agencies. Combine the two and…

POOF…you magically have 80% of the structure rated ‘AAA’… despite the underlying collateral being a collection of BBB and BBB- rated assets.

But here’s the real scandal:

‘Real money’ [U.S. insurance companies, pension funds, etc.] accounts had stopped purchasing mezzanine tranches of U.S. Subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to ‘mark up’ these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!

He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the ‘excess’ pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt…until now.

Mystery solved, then.