ABCs of CDO (CLO, CBO, CDO of ABS)

After illustrating several CDO variations, I illustrate a generic CDO and consider the key differences that give rise to the alphabet soup of collateralized debt obligations (CDOs). The key differences concern the following. Motivation: bank seeks to remove assets from balance sheet (balance sheet) or investors hire collateral manager to seek yield (arbitrage). Risk Transfer: true sale or synthetic via credit default swaps (CDS). Reference Portfolio: many different types but either "physical debt" (loans, bonds) or structured debt (ABS, CDO). Funded: do investors fund (i.e., indirectly sell credit protection to) the entire reference portfolio or only part of the portfolio

Category:

Education

Tags:

• Finance
• Derivatives

[discosuks]

Left out the part about the bagholders now greeting customers at WalMart.

[bionicturtledotcom]

not everything is about you ;)

[discosuks]

David, none of it is about me. My eyes were open. What it is about is a legal Ponzi scheme that was more about creating wealth than it was about spreading risk. Shame on anyone who ever had anything to do with synthetic credit derivatives. They are the cause of some of the worst finacial damage the world has ever, ever seen. Today the destruction continues, but the lawsuits will follow soon. The CFAs and CFPs who taught, recommended, or marketed these had better have their ducks in a row!

[bionicturtledotcom]

Just teasing. I don't disagree. Those who should be shamed, not taking a fiduciary seriously in the first place, don't know shame, unless forced by law, as you say. Credit derivatives are *not* bad, even the synthetics. They have a valuable role. The folks pushing these around, in many cases, were salespeople without concern for details. The CFP isn't the CFA; most CFAs (that i know) were not distracted here; e.g., they don't take agency ratings as the last word.

[DAVEBLISS2007]

No wonder the banking system is under collapse, this stupid obsession with gobbledygook, and completely mythical construct of money and value is just incomprehensible. I have a PhD but I can't understand what this guy is try to explain. But I'm just a humble scientist. And nowhere bright enough to understand how money is generated from thin air in the banking system. It's just like a complex gambling casino.

[bionicturtledotcom]

thanks that's helpful. Probably all true, except the humble part ;)

[dajieda0]

who is buying the super senior tranches (partially funded)?

[victimofsleep]

Thanks for this!! It cleared up a little of my doubts. But I don't really understand when you were talking about partially funded porfolios.

[blushing6]

You can convert this to an mp3 at audiogetnow..com

[TrillSk]

as always this is excellent.. between david harper and paddy hirsch who needs a formal education :P

[pussyfever]

The explanation is for noobs. If you don't understand your PhD in garbage collecting is worth nothing.

[Geotubest]

It does seem that people today want to slam anyone involved in credit derivatives. Credit derivatives have their place, but people got too cocky with them and bought into too many assumptions (eg. real estate prices will keep going up; low correlation assumptions; etc). How this market was not regulated in the first place is the same type of group think phenomena that led the US into the Iraq War.

[fancychance57]

explain in english.