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Federal Reserves
Angry Bear — By Robert Waldmann Felix Salmon explains how to make a synthetic bond. you buy a synthetic IBM five-year bond instead, taking advantage of the much more liquid CDS market. Essentially, you take the $100 million that you were going to spend on IBM bonds, and you put it into a special-purpose entity called, say, Fred. (In reality, it'll be called something really boring like Synthetic Technology Invetments Cayman III Limited, but Fred is easier to remember.) First, Fred takes the $100 million and invests it in 5-year Treasury bonds. Next thing, ...

Were Mistakes Made?
Matthew Yglesias — Ezra Klein writes: I’ve spent part of the day reading about super senior tranches and synthetic bonds and all the rest, and on some level, I think we’re making this too complicated. I tend to agree with Ezra. Which is to say that though the specifics of how the super-senior tranche is created are very complicated, the underlying bet behind the super-senior tranche is very simple — it was a bet that any future housing price declines would be localized, and that it wasn’t possible for their to ...