Banks positioned themselves with no real upside and a lot of downside from black swans, receiving a little cash flow in exchange for bearing all the downside.

Judge as of January 2009 against the documented risk positions of major banks before the 2007–08 crisis. True: credible analyses show that large banks commonly held positions (e.g. super-senior CDO tranches, written credit protection, carry trades) that earned small steady income while exposing them to large, rare losses, i.e. limited upside and heavy tail downside. Mostly true: this describes the dominant pattern, but 'no real upside' or 'all the downside' overstates it (e.g. banks earned substantial fees, or some losses were shifted elsewhere). Mixed: the pattern applies to a major share of banks or activities but not to most. Mostly false: it applies only to a narrow subset of banks or positions and is presented as general. False: the evidence shows banks were not generally exposed in this asymmetric way.

Set before the research began.

1. E1 Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007–2009 Foundations and Trends in Finance (V. V. Acharya, T. Cooley, M. Richardson, I. Walter; NYU Stern) · 2009

   “Take the AAA-rated tranches of subprime CDOs. True, they were risky. But banks that held these tranches had it both ways: On the up side, they reduced their capital requirements, and they (or other investors) earned the higher premium commanded by the risky nature of subprime loans.”

2. E2 Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007–2009 Foundations and Trends in Finance (V. V. Acharya, T. Cooley, M. Richardson, I. Walter; NYU Stern) · 2009

   “On the down side, losses would only occur if a large number of subprime mortgages got hit at once, in which case even the AAA tranche of a CDO got hit.”

3. E3 080418 Shareholder Report - UBS UBS AG · 18 April 2008

   “The UBS funding framework (for further details on this see section 5.8) facilitated relatively high levels of CDO warehouse activity, as the securities in the warehouse provided positive carry (until 2007, when market conditions generated increasingly large losses).”

4. E4 SEC Complaint: Citigroup Inc. U.S. Securities and Exchange Commission (filed in U.S. District Court, D.C.) · 29 July 2010

   “Citigroup earned fees in connection with its CDO structuring business.”

E1 and E2, an independent NYU Stern analysis, describe banks holding AAA subprime CDO tranches. These earned a premium and lowered capital requirements, but took losses when many mortgages failed at once. That is the pattern of steady small income with rare, large losses. UBS's own report (E3) likewise says its CDO warehouse securities earned positive carry until 2007, when losses grew large. Still, the SEC complaint (E4) says Citigroup earned fees from CDO structuring, and E1 frames the premium and capital relief as real gains, so "no real upside" and "all the downside" overstate the asymmetry.