Financial Weapons of Mass Destruction

To financial engineers, CDO derivatives are gorgeous. They can be twisted and turned into a million tantalizing shapes. One beauty is called a "CDO squared." You've got a bunch of high-risk CDO equity tranches that just aren't selling. So what do you do? You make more wine. You pour all those bottom-tranche glasses into a new bottle. Then you create another upside-down pyramid of glasses, and sell them, with your wine pouring, from the top down. (The idea is to gather up hundreds of bottom-tranche wine glasses from many different CDOs, so that you'll have enough wine for a new bottle. In theory, they shouldn't all go dry at the same time.) With a little bit of guile, luck, and some fancy mathematical modeling that befuddles the all-too-willing rating agencies, you've created a high-rated, highly marketable new set of senior tranche securities—all based on the junk of the junk.