Us Stock Market and the Us Bond Market

1. The major difference between the US stock market and the US bond market is that the stock market is highly regulated and policed. There is still a chance to be ripped off by Wall Street companies; however, regulations and policies are making it much harder in comparison to the US bond market, because there is always a chance to be caught when trying to cheat in the stock market. Also investors of the US equities know exactly what is happening to their assets. The stock market has become much regulated due to the presence of millions of individual investors.

On contrary, the majority of bond market investors are large institutional investors. There is a lack of strict regulations in the bond market; therefore, bond traders are not afraid to act unfairly as they know there will be no intervention from the authorities. During national recession, bond traders were using ignorance of their customers to generate huge amounts of money.

1. Greg Lippmann was the bond trader at Deutsche Bank. He was considered to be a great trader; however, a lot of his colleges detested him for his selfishness. But Lippmann was the one of the few traders on Wall Street realizing that the bond market is going to collapse and he was trying to pitch his idea to Steve Eisman.  At the same time, he truly understood how CDS worked and Eisman could not comprehend why Greg Lippmann would want to bet against the derivatives his own company was selling.
2. There are several parties involved in trading derivatives such as CDS and CDO. A lot of investors were not realizing that large investment banks were only acting as an intermediary. The party on the other side of these agreements was the AAA-rated insurance company – AIG. At first, the insurance company was actively involved in the corporate CDS market, but once CDS for subprime market and other types of loans were created, AIG started selling those derivatives in colossal amounts. But then at the end of 2004, insurance conglomerate by replacing a majority of its loans for subprime mortgages CDS has become the world’s biggest owner of subprime mortgage bonds.
3. CDO is a pool of hundreds and thousands of MBS products. CDO were creating to reform the original tranches of mortgage bonds, meaning that all triple-B tranches were gathered together and were creating a new tower of tranches. It helped to sell even the riskiest bottom tranches of mortgage bonds as they now were rated as the triple-A ones. Goldman Sachs was the originator of CDO and the company managed to persuade rating agencies that those new towers of tranches are not exactly the same things. Goldman Sachs argued that CDO were creating a complete new diversified portfolios of assets. However, this argument did not make sense, because all of the tranches that CDO contained were still remaining extremely risky (BBB). But since the rating agencies have been paid a big fees by Goldman Sachs, they decided to assign a triple-A ratings to 80 percent of a new structure of mortgage bond tranches.