In response the request for additional questions for the Too Big to Fail bankers from Bill Thomas of the FCIC, I emailed the following:
Did anyone at your firm ever market a synthetic or hybrid CDO investment as a bond? Please provide any emails, presentations, brochures or other marketing literature that your firm produced that indicates that a synthetic or hybrid CDO can be treated by investors as bonds. Also indicate any disclosures that clarify for investors the substantial differences between derivative markets and bond markets.
If the answer to the first question above is not “No”, please disclose who authorized the marketing of derivatives as bonds. Also please explain what justification was given within your firm for asking investors to put money that was earmarked for the bond market — where at the initial offering of the contract both sides of the trade expect to benefit — into a derivative-backed position — where it is known from the date of the initial offering of the contract that there would be significant losses for one or more of the parties to the contract. That is, please explain why you encouraged managers of funds destined for the bond market to indirectly take derivative positions — which were expected to perform extremely poorly according to the analysis of sophisticated clients of your firm (that is, by counterparties to the trade) — and thereby encouraged these managers to divert their funds from the bond market to the derivative markets.