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Collateralizeddebtobligation
FromWikipedia,thefreeencyclopedia

Acollateralizeddebtobligation(CDO)isatypeofstructuredassetbackedsecurity(ABS).[1]Originallydevelopedforthecorporatedebtmarkets,
overtimeCDOsevolvedtoencompassthemortgageandmortgagebackedsecurity("MBS")markets.[2]
Likeotherprivatelabelsecuritiesbackedbyassets,aCDOcanbethoughtofasapromisetopayinvestorsinaprescribedsequence,basedonthecash
flowtheCDOcollectsfromthepoolofbondsorotherassetsitowns.TheCDOis"sliced"into"tranches",which"catch"thecashflowofinterestand
principalpaymentsinsequencebasedonseniority.[3]IfsomeloansdefaultandthecashcollectedbytheCDOisinsufficienttopayallofitsinvestors,
thoseinthelowest,most"junior"tranchessufferlossesfirst.Thelasttolosepaymentfromdefaultarethesafest,mostseniortranches.Consequently,
couponpayments(andinterestrates)varybytranchewiththesafest/mostseniortranchespayingthelowestratesandthelowesttranchespayingthe
highestratestocompensateforhigherdefaultrisk.Asanexample,aCDOmightissuethefollowingtranchesinorderofsafeness:SeniorAAA
(sometimesknownas"supersenior")JuniorAAAAAABBBResidual.[4]
SeparatespecialpurposeentitiesratherthantheparentinvestmentbankissuetheCDOsandpayinteresttoinvestors.AsCDOsdeveloped,some
sponsorsrepackagedtranchesintoyetanotheriteration,knownas"CDOsquared"or"CDOsofCDOs."[4]
Intheearly2000s,CDOsweregenerallydiversified,[5]butby20062007whentheCDOmarketgrewtohundredsofbillionsofdollarsthis
changed.CDOcollateralbecamedominatednotbyloans,butbylowerlevel(BBBorA)tranchesrecycledfromotherassetbackedsecurities,whose
assetswereusuallynonprimemortgages.[6]TheseCDOshavebeencalled"theenginethatpoweredthemortgagesupplychain"fornonprime
mortgages,[7]andarecreditedwithgivinglendersgreaterincentivetomakenonprimeloans[8]leadinguptothe20079subprimemortgagecrisis.

Contents
1 Markethistory
1.1 Beginnings
1.1.1 Explanationsforgrowth
1.2 Subprimemortgageboom

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1.2 Subprimemortgageboom
1.2.1 Explanationsforgrowth
1.3 Crash
1.4 Criticism
2 Concept,structures,varieties
2.1 Concept
2.2 Structures
2.3 Taxation
2.4 Types
2.5 Typesofcollateral
2.6 Transactionparticipants
2.6.1 Investors
2.6.2 Underwriter
2.6.3 Theassetmanager
2.6.4 Thetrusteeandcollateraladministrator
2.6.5 Accountants
2.6.6 Attorneys
3 Seealso
4 References
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5 Externallinks

Markethistory
Beginnings
ThefirstCDOwasissuedin1987bybankersatnowdefunctDrexelBurnhamLambertInc.forthealsonowdefunctImperialSavingsAssociation.[9]
Duringthe1990sthecollateralofCDOswasgenerallycorporateandemergingmarketbondsandbankloans.[10]After1998"multisector"CDOswere
developedbyPrudentialSecurities,[11]butCDOsremainedfairlyobscureuntilafter2000.[12]In2002and2003CDOshadasetbackwhenrating
agencies"wereforcedtodowngradehundreds"ofthesecurities,[13]butsalesofCDOsgrewfrom$69billionin2000toaround$500billionin
2006.[14]From2004through2007,$1.4trillionworthofCDOswereissued.[15]
EarlyCDOswerediversified,andmightincludeeverythingfromaircraftleaseequipmentdebt,manufacturedhousingloans,tostudentloansandcredit
carddebt.Thediversificationofborrowersinthese"multisectorCDOs"wasasellingpoint,asitmeantthatiftherewasadownturninoneindustrylike
aircraftmanufacturingandtheirloansdefaulted,otherindustrieslikemanufacturedhousingmightbeunaffected.[16]Anothersellingpointwasthat
CDOsofferedreturnsthatweresometimes23percentagepointshigherthancorporatebondswiththesamecreditrating.[16][17]
Explanationsforgrowth
AdvantagesofsecuritizationDepositorybankshadincentiveto"securitize"loanstheyoriginatedoftenintheformofCDOsecurities
becausethisremovestheloansfromtheirbooks.Thetransferoftheseloans(alongwithrelatedrisk)tosecuritybuyinginvestorsbanksinreturn
forcashreplenishesthebanks'capital.Thisenabledthemtoremainincompliancewithcapitalrequirementlawswhilelendingagainand
generatingadditionaloriginationfees.
GlobaldemandforfixedincomeinvestmentsFrom2000to2007worldwidefixedincomeinvestment(i.e.investmentsinbondsandother
conservativesecurities)roughlydoubledinsizeto$70trillion,yetthesupplyofrelativelysafe,incomegeneratinginvestmentshadnotgrownas
fast,whichbidupbondpricesanddrovedowninterestrates.[18][19]InvestmentbanksonWallStreetansweredthisdemandwithfinancial
innovationsuchasthemortgagebackedsecurity(MBS)andcollateralizeddebtobligation(CDO),whichwereassignedsaferatingsbythecredit
ratingagencies.[19]
LowinterestratesFearsofdeflation,theburstingofthedotcombubble,aU.S.recession,andtheU.S.tradedeficitkeptinterestrateslow
globallyfrom2000to20045,accordingtoEconomistMarkZandi.[20]ThelowyieldofthesafeUSTreasurybondscreateddemandbyglobal
investorsforsubprimemortgagebackedCDOswiththeirrelativelyhighyieldsbutcreditratingsashighastheTreasuries.Thissearchforyield
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byglobalinvestorscausedmanytopurchaseCDOs,thoughtheylivedtoregrettrustingthecreditratingagencies'ratings.[21]
PricingmodelsGaussiancopulamodels,introducedin2001byDavidX.Li,allowedfortherapidpricingofCDOs.[22][23]

Subprimemortgageboom
Around2005,astheCDOmarketcontinuedtogrow,subprimemortgagesbegantoreplacethediversifiedconsumerloansascollateral.By2004,
mortgagebackedsecuritiesaccountedformorethanhalfofthecollateralinCDOs.[7][25][26][27][28][29]AccordingtotheFinancialCrisisInquiryReport,
"theCDObecametheenginethatpoweredthemortgagesupplychain",[7]promotinganincreaseindemandformortgagebackedsecuritieswithout
whichlenderswouldhave"hadlessreasontopushsohardtomake"nonprimeloans.[8]CDOsnotonlyboughtcrucialtranchesofsubprimemortgage
backedsecurities,theyprovidedcashfortheinitialfundingofthesecurities.[7]Between2003and2007,WallStreetissuedalmost$700billioninCDOs
thatincludedmortgagebackedsecuritiesascollateral.[7]Despitethislossofdiversification,CDOtranchesweregiventhesameproportionofhigh
ratingsbyratingagencies[30]onthegroundsthatmortgageswerediversifiedbyregionandso"uncorrelated"[31]thoughthoseratingswerelowered
aftermortgageholdersbegantodefault.[32][33]
Theriseof"ratingsarbitrage"i.e.poolinglowratedtranchestomakeCDOshelpedpushsalesofCDOstoabout$500billionin2006,[14]witha
globalCDOmarketofoverUSD$1.5trillion.[34]CDOwasthefastestgrowingsectorofthestructuredfinancemarketbetween2003and2006the
numberofCDOtranchesissuedin2006(9,278)wasalmosttwicethenumberoftranchesissuedin2005(4,706).[35]
CDOs,likemortgagebackedsecurities,werefinancedwithdebt,enhancingtheirprofitsbutalsoenhancinglossesifthemarketreversedcourse.[36]
Explanationsforgrowth
Subprimemortgageshadbeenfinancedbymortgagebackedsecurities(MBS).LikeCDOs,MBSswerestructuredintotranches,butissuersofthe
securitieshaddifficultysellingthemorelowerlevel/lowerrated"mezzanine"tranchesthetranchesratedsomewherefromAAtoBB.

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Source:FinalReportoftheNationalCommissionontheCausesofthe
FinancialandEconomicCrisisintheUnitedStates
(http://www.gpo.gov/fdsys/pkg/GPOFCIC/pdf/GPOFCIC.pdf),p.128,figure
8.1

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IMFDiagramofCDOandRMBS

[B]ecausemosttraditionalmortgageinvestorsareriskaverse,eitherbecauseof
therestrictionsoftheirinvestmentchartersorbusinesspractices,theyare
interestedinbuyingthehigherratedsegmentsoftheloanstackasaresult,
thoseslicesareeasiesttosell.Themorechallengingtaskisfindingbuyersfor
theriskierpiecesofatthebottomofthepile.Thewaymortgagesecuritiesare
structured,ifyoucannotfindbuyersforthelowerratedslices,therestofthe
poolcannotbesold.[37][38]
Todealwiththeprobleminvestmentbankers"recycled"themezzaninetranches,selling
themtounderwritersmakingmorestructuredsecuritiesCDOs.Thoughthepoolthatmade
uptheCDOcollateralmightbeoverwhelminglymezzaninetranches,mostofthetranches
(70[39]to80%[40][41])oftheCDOwereratednotBBB,A,etc.,buttripleA.Theminorityof
thetranchesthatweremezzaninewereoftenboughtupbyotherCDOs,concentratingthe
lowerratedtranchesstillfurther.(seecharton"TheTheoryofHowtheFinancialSystem
CreatedAAratedAssetsoutofSubprimeMortgages")

Securitizationmarketswereimpairedduringthecrisis.

Asonejournalist(GretchenMorgenson)putit,CDOsbecame"theperfectdumpingground
forthelowratedslicesWallStreetcouldn'tsellonitsown."[37]
OtherfactorsexplainingthepopularityofCDOsinclude:
Growingdemandforfixedincomeinvestmentsthatstartedearlierinthedecade
continued.[18][19]A"globalsavingsglut"[42]leadingto"largecapitalinflows"from
abroadhelpedfinancethehousingboom,keepingdownUSmortgagerates,evenafter
theFederalReserveBankhadraisedinterestratestocoolofftheeconomy.[43]
Supplygeneratedby"hefty"feestheCDOindustryearned.Accordingto"onehedge
fundmanagerwhobecameabiginvestorinCDOs",asmuch"as40to50percent"of
thecashflowgeneratedbytheassetsinaCDOwentto"paythebankers,theCDO
manager,theratingagencies,andotherswhotookoutfees."[13]Ratingagenciesin
particularwhosehighratingsoftheCDOtrancheswerecrucialtotheindustryand
whowerepaidbyCDOissuersearnedextraordinaryprofits.Moody'sInvestors
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ThevolumeofCDOsissuedgloballycrashedduringthe
subprimecrisisbuthasrecoveredslightly.(source:SIFMA,
Statistics,StructuredFinance[24]

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Service,oneofthetwobiggestratingagencies,couldearn"asmuchas$250,000torateamortgagepoolwith$350millioninassets,versusthe
$50,000infeesgeneratedwhenratingamunicipalbondofasimilarsize."In2006,revenuesfromMoody'sstructuredfinancedivision"accounted
forfully44%"ofallMoody'ssales.[44][45]Moody'soperatingmarginswere"consistentlyover50%,makingitoneofthemostprofitable
companiesinexistence"moreprofitableintermsofmarginsthanExxonMobilorMicrosoft.[46]BetweenthetimeMoody'swasspunoffasa
publiccompanyandFebruary2007,itsstockrose340%.[46][47]
Trustinratingagencies.CDOmanagers"didn'talwayshavetodisclosewhatthesecuritiescontained"becausethecontentsoftheCDOwere
subjecttochange.Butthislackoftransparencydidnotaffectdemandforthesecurities.Investors"weren'tsomuchbuyingasecurity.Theywere
buyingatripleArating,"accordingtobusinessjournalistsBethanyMcLeanandJoeNocera.[13]
Financialinnovations,suchascreditdefaultswapsandsyntheticCDO.Creditdefaultswapsprovidedinsurancetoinvestorsagainstthepossibility
oflossesinthevalueoftranchesfromdefaultinexchangeforpremiumlikepayments,makingCDOsappear"tobevirtuallyriskfree"to
investors.[48]SyntheticCDOswerecheaperandeasiertocreatethanoriginal"cash"CDOs.Synthetics"referenced"cashCDOs,replacinginterest
paymentsfromMBStrancheswithpremiumlikepaymentsfromcreditdefaultswaps.Ratherthanprovidingfundingforhousing,syntheticCDO
buyinginvestorswereineffectprovidinginsuranceagainstmortgagedefault.[49]IftheCDOdidnotperformpercontractualrequirements,one
counterparty(typicallyalargeinvestmentbankorhedgefund)hadtopayanother.[50]Asunderwritingstandardsdeterioratedandthehousing
marketbecamesaturated,subprimemortgagesbecamelessabundant.SyntheticCDOsbegantofillinfortheoriginalcashCDOs.Becausemore
thanoneinfactnumeroussyntheticscouldbemadetoreferencethesameoriginal,theamountofmoneythatmovedamongmarket
participantsincreaseddramatically.

Crash
Inthesummerof2006,theCaseShillerindexofhousepricespeaked.[52]InCaliforniahomepriceshadmorethandoubledsince2000[53]andmedian
housepricesinLosAngeleshadrisentotentimesthemedianannualincome.Toenticethelowandmoderateincometosignupformortgages,down
payments,incomedocumentationwereoftendispensedwithandinterestandprincipalpaymentswereoftendeferreduponrequest.[54]JournalistMichael
LewisgaveasanexampleofunsustainableunderwritingpracticesaloaninBakersfield,California,where"aMexicanstrawberrypickerwithanincome
of$14,000andnoEnglishwaslenteverypennyheneededtobuyahouseof$724,000".[54]
Astwoyear"teaser"mortgageratescommonwiththatmadehomepurchaseslikethisexpired,andmortgagepaymentsskyrocketed.Refinancingto
lowermortgagepaymentwasnolongeravailablesinceitdependedonrisinghomeprices.[55]Mezzaninetranchesstartedtolosevaluein2007,bymid
yearAAtrancheswereworthonly70centsonthedollar.ByOctobertripleAtrancheshadstartedtofall.[56]Regionaldiversificationnotwithstanding,
themortgagebackedsecuritiesturnedouttobehighlycorrelated.[10]
BigCDOarrangerslikeCitigroup,MerrillLynchandUBSexperiencedsomeofthebiggestlosses,asdidfinancialguaranteerssuchasAIG,Ambac,
MBIA.[10]
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AnearlyindicatorofthecrisiscameinJuly2007whenratingagenciesmadeunprecedentedmassdowngradesofmortgagerelatedsecurities[57](bythe
endof200891%ofCDOsecuritiesweredowngraded[58]),andtwohighlyleveragedBearStearnshedgefundsholdingMBSsandCDOscollapsed.
InvestorswereinformedbyBearStearnsthattheywouldgetlittleifanyoftheirmoneyback.[59][60]
InOctoberandNovembertheCEOsofMerrillLynchandCitigroupresignedafterreportingmultibilliondollarlossesandCDOdowngrades.[61][62][63]
AstheglobalmarketforCDOsdriedup[64][65]thenewissuepipelineforCDOsslowedsignificantly,[66]andwhatCDOissuancetherewasusuallyinthe
formofcollateralizedloanobligationsbackedbymiddlemarketorleveragedbankloans,ratherthanhomemortgageABS.[67]TheCDOcollapsehurt
mortgagecreditavailabletohomeownerssincethebiggerMBSmarketdependedonCDOpurchasesofmezzaninetranches.[68][69]
Whilenonprimemortgagedefaultsaffectedallsecuritiesbackedbymortgages,CDOswereespeciallyhardhit.Morethanhalf$300billionworth
oftranchesissuedin2005,2006,and2007ratedmostsafetripleAbyratingagencies,wereeitherdowngradedtojunkstatusorlostprincipalby
2009.[51]Incomparison,onlysmallfractionsoftripleAtranchesofAltAorsubprimemortgagebackedsecuritiessufferedthesamefate.(seeImpaired
Securitieschart)
Collateralizeddebtobligations(CDOs)alsomadeupoverhalf($542billion)
ofthenearlytrilliondollarsinlossessufferedbyfinancialinstitutionsfrom
2007toearly2009.[32]

Criticism
Priortothecrisis,afewacademics,analystsandinvestorssuchasWarren
Buffett(whofamouslydisparagedCDOsandotherderivativesas"financial
weaponsofmassdestruction,carryingdangersthat,whilenowlatent,are
potentiallylethal"[70]),andtheIMF'sformerchiefeconomistRaghuram
Rajan[71]warnedthatratherthanreducingriskthroughdiversification,CDOs
andotherderivativesspreadriskanduncertaintyaboutthevalueofthe
underlyingassetsmorewidely.
Duringandafterthecrisis,criticismoftheCDOmarketwasmorevocal.
Accordingtotheradiodocumentary"GiantPoolofMoney",itwasthestrong
demandforMBSandCDO,thatdrovedownhomelendingstandards.

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Mortgageswereneededforcollateralandbyapproximately2003,thesupply
ofmortgagesoriginatedattraditionallendingstandardshadbeen
exhausted.[19]
TheheadofbankingsupervisionandregulationattheFederalReserve,
PatrickParkinson,termed"thewholeconceptofABSCDOs",an
"abomination".[10]

Morethanhalfofthehighestrated(Aaa)CDOswere"impaired"(losing
principalordowngradedtojunkstatus),comparedtoasmallfractionof
similarlyratedSubprimeandAltAmortgagebackedsecurities.(source:
FinancialCrisisInquiryReport [51])

InDecember2007,journalistsCarrickMollenkampandSerenaNgwroteofaCDOcalledNormacreatedbyMerrillLynchatthebehestofIllinois
hedgefund,Magnetar.Itwasatailormadebetonsubprimemortgagesthatwent"toofar."JanetTavakoli,aChicagoconsultantwhospecializesin
CDOssaidNorma"isatangledhairballofrisk."WhenitcametomarketinMarch2007,"anysavvyinvestorwouldhavethrownthis...inthetrash
bin."[72][73]
AccordingtojournalistsBethanyMcLeanandJoeNocera,nosecuritiesbecame"morepervasiveor[did]moredamagethancollateralizeddebt
obligations"tocreatetheGreatRecession.[12]
GretchenMorgensondescribedthesecuritiesas"asortofsecretrefuseheapfortoxicmortgages[that]createdevenmoredemandforbadloansfrom
wantonlenders".
CDOsprolongedthemania,vastlyamplifyingthelossesthatinvestorswouldsufferandballooningtheamountsoftaxpayermoneythat
wouldberequiredtorescuecompanieslikeCitigroupandtheAmericanInternationalGroup."...[74]
Inthefirstquarterof2008alone,creditratingagenciesannounced4,485downgradesofCDOs.[67]Atleastsomeanalystscomplainedtheagenciesover
reliedoncomputermodelswithimpreciseinputs,failedtoaccountadequatelyforlargerisks(likeanationwidecollapseofhousingvalues),and
assumedtheriskofthelowratedtranchesthatmadeupCDOswouldbedilutedwheninfactthemortgageriskswerehighlycorrelated,andwhenone
mortgagedefaulted,manydid,affectedbythesamefinancialevents.[32][75]
TheywerestronglycriticizedbyeconomistJosephStiglitz,amongothers.Stiglitzconsideredtheagencies"oneofthekeyculprits,"ofthecrisiswho
"performedthatalchemythatconvertedthesecuritiesfromFratedtoArated.Thebankscouldnothavedonewhattheydidwithoutthecomplicityof
theratingsagencies."[76][77]AccordingtoMorgensontheagencieshadpretendedtotransform"drossintogold."[44]

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"Asusual,theratingsagencieswerechronicallybehindondevelopmentsinthefinancialmarketsandtheycouldbarelykeepupwiththe
newinstrumentsspringingfromthebrainsofWallStreet'srocketscientists.Fitch,Moody's,andS&Ppaidtheiranalystsfarlessthanthebig
brokeragefirmsdidand,notsurprisinglywoundupemployingpeoplewhowereoftenlookingtobefriend,accommodate,andimpressthe
WallStreetclientsinhopesofgettinghiredbythemforamultipleincreaseinpay....Their[theratingagencies]failuretorecognizethat
mortgageunderwritingstandardshaddecayedortoaccountforthepossibilitythatrealestatepricescoulddeclinecompletelyundermined
theratingsagencies'modelsandundercuttheirabilitytoestimatelossesthatthesesecuritiesmightgenerate."[78]
MichaelLewisalsopronouncedthetransformationofBBBtranchesinto80%tripleACDOsas"dishonest","artificial"andtheresultof"fatfees"paid
toratingagenciesbyGoldmanSachsandotherWallStreetfirms.[79]
SyntheticCDOswerecriticizedinparticular,becauseofthedifficultiestojudge(andprice)theriskinherentinthatkindofsecuritiescorrectly.That
adverseeffectrootsinthepoolingandtranchingactivitiesoneverylevelofthederivation.[3]
Otherspointedouttheriskofundoingtheconnectionbetweenborrowersandlendersremovingthelender'sincentivetoonlypickborrowerswhowere
creditworthyinherentinallsecuritization.[80][81][82]AccordingtoeconomistMarkZandi:"Asshakymortgageswerecombined,dilutinganyproblems
intoalargerpool,theincentiveforresponsibilitywasundermined."[21]
Zandiandothersalsocriticizedlackofregulation."Financecompaniesweren'tsubjecttothesameregulatoryoversightasbanks.Taxpayersweren'ton
thehookiftheywentbellyup[precrisis],onlytheirshareholdersandothercreditorswere.Financecompaniesthushadlittletodiscouragethemfrom
growingasaggressivelyaspossible,evenifthatmeantloweringorwinkingattraditionallendingstandards."[21]

Concept,structures,varieties
Concept
CDOsvaryinstructureandunderlyingassets,butthebasicprincipleisthesame.ACDOisatypeofassetbackedsecurity.TocreateaCDO,a
corporateentityisconstructedtoholdassetsascollateralbackingpackagesofcashflowswhicharesoldtoinvestors.[83]Asequenceinconstructinga
CDOis:
Aspecialpurposeentity(SPE)isdesigned/constructedtoacquireaportfolioofunderlyingassets.Commonunderlyingassetsheldmayinclude
mortgagebackedsecurities,commercialrealestatebondsandcorporateloans.
TheSPEissuesbondstoinvestorsinexchangeforcash,whichareusedtopurchasetheportfolioofunderlyingassets.LikeotherABSprivate
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labelsecurities,thebondsarenotuniformbutissuedinlayerscalledtranches,eachwithdifferentriskcharacteristics.Seniortranchesarepaid
fromthecashflowsfromtheunderlyingassetsbeforethejuniortranchesandequitytranches.Lossesarefirstbornebytheequitytranches,next
bythejuniortranches,andfinallybytheseniortranches.[84]
AcommonanalogycomparesthecashflowfromtheCDO'sportfolioofsecurities(saymortgagepaymentsfrommortgagebackedbonds)towater
flowingintocupsoftheinvestorswhereseniortrancheswerefilledfirstandoverflowingcashflowedtojuniortranches,thenequitytranches.Ifalarge
portionofthemortgagesenterdefault,thereisinsufficientcashflowtofillallthesecupsandequitytrancheinvestorsfacethelossesfirst.
TheriskandreturnforaCDOinvestordependsbothonhowthetranchesaredefined,andontheunderlyingassets.Inparticular,theinvestmentdepends
ontheassumptionsandmethodsusedtodefinetheriskandreturnofthetranches.[85]CDOs,likeallassetbackedsecurities,enabletheoriginatorsofthe
underlyingassetstopasscreditrisktoanotherinstitutionortoindividualinvestors.ThusinvestorsmustunderstandhowtheriskforCDOsiscalculated.
TheissueroftheCDO,typicallyaninvestmentbank,earnsacommissionatthetimeofissueandearnsmanagementfeesduringthelifeoftheCDO.
TheabilitytoearnsubstantialfeesfromoriginatingCDOs,coupledwiththeabsenceofanyresidualliability,skewstheincentivesoforiginatorsinfavor
ofloanvolumeratherthanloanquality.
Insomecases,theassetsheldbyoneCDOconsistedentirelyofequitylayertranchesissuedbyotherCDOs.ThisexplainswhysomeCDOsbecame
entirelyworthless,astheequitylayertrancheswerepaidlastinthesequenceandtherewasn'tsufficientcashflowfromtheunderlyingsubprime
mortgages(manyofwhichdefaulted)totrickledowntotheequitylayers.

Structures
CDOisabroadtermthatcanrefertoseveraldifferenttypesofproducts.Theycanbecategorizedinseveralways.Theprimaryclassificationsareas
follows:
Sourceoffundscashflowvs.marketvalue
CashflowCDOspayinterestandprincipaltotrancheholdersusingthecashflowsproducedbytheCDO'sassets.CashflowCDOsfocus
primarilyonmanagingthecreditqualityoftheunderlyingportfolio.
MarketvalueCDOsattempttoenhanceinvestorreturnsthroughthemorefrequenttradingandprofitablesaleofcollateralassets.TheCDOasset
managerseekstorealizecapitalgainsontheassetsintheCDO'sportfolio.ThereisgreaterfocusonthechangesinmarketvalueoftheCDO's
assets.MarketvalueCDOsarelongerestablished,butlesscommonthancashflowCDOs.
Motivationarbitragevs.balancesheet
Arbitragetransactions(cashflowandmarketvalue)attempttocaptureforequityinvestorsthespreadbetweentherelativelyhighyieldingassets
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andtheloweryieldingliabilitiesrepresentedbytheratedbonds.Themajority,86%,ofCDOsarearbitragemotivated.[86]
Balancesheettransactions,bycontrast,areprimarilymotivatedbytheissuinginstitutionsdesiretoremoveloansandotherassetsfromtheir
balancesheets,toreducetheirregulatorycapitalrequirementsandimprovetheirreturnonriskcapital.Abankmaywishtooffloadthecreditrisk
toreduceitsbalancesheet'screditrisk.
Fundingcashvs.synthetic
CashCDOsinvolveaportfolioofcashassets,suchasloans,corporatebonds,assetbackedsecuritiesormortgagebackedsecurities.Ownershipof
theassetsistransferredtothelegalentity(knownasaspecialpurposevehicle)issuingtheCDO'stranches.Theriskoflossontheassetsisdivided
amongtranchesinreverseorderofseniority.CashCDOissuanceexceeded$400billionin2006.
SyntheticCDOsdonotowncashassetslikebondsorloans.Instead,syntheticCDOsgaincreditexposuretoaportfoliooffixedincomeassets
withoutowningthoseassetsthroughtheuseofcreditdefaultswaps,aderivativesinstrument.(Undersuchaswap,thecreditprotectionseller,the
CDO,receivesperiodiccashpayments,calledpremiums,inexchangeforagreeingtoassumetheriskoflossonaspecificassetintheeventthat
assetexperiencesadefaultorothercreditevent.)LikeacashCDO,theriskoflossontheCDO'sportfolioisdividedintotranches.Losseswill
firstaffecttheequitytranche,nextthejuniortranches,andfinallytheseniortranche.Eachtranchereceivesaperiodicpayment(theswap
premium),withthejuniortranchesofferinghigherpremiums.
AsyntheticCDOtranchemaybeeitherfundedorunfunded.Undertheswapagreements,theCDOcouldhavetopayuptoacertainamount
ofmoneyintheeventofacrediteventonthereferenceobligationsintheCDO'sreferenceportfolio.Someofthiscreditexposureisfunded
atthetimeofinvestmentbytheinvestorsinfundedtranches.Typically,thejuniortranchesthatfacethegreatestriskofexperiencingaloss
havetofundatclosing.Untilacrediteventoccurs,theproceedsprovidedbythefundedtranchesareofteninvestedinhighquality,liquid
assetsorplacedinaGIC(GuaranteedInvestmentContract)accountthatoffersareturnthatisafewbasispointsbelowLIBOR.Thereturn
fromtheseinvestmentsplusthepremiumfromtheswapcounterpartyprovidethecashflowstreamtopayinteresttothefundedtranches.
Whenacrediteventoccursandapayouttotheswapcounterpartyisrequired,therequiredpaymentismadefromtheGICorreserve
accountthatholdstheliquidinvestments.Incontrast,seniortranchesareusuallyunfundedastheriskoflossismuchlower.Unlikeacash
CDO,investorsinaseniortranchereceiveperiodicpaymentsbutdonotplaceanycapitalintheCDOwhenenteringintotheinvestment.
Instead,theinvestorsretaincontinuingfundingexposureandmayhavetomakeapaymenttotheCDOintheeventtheportfolio'slosses
reachtheseniortranche.Fundedsyntheticissuanceexceeded$80billionin2006.Fromanissuanceperspective,syntheticCDOstakeless
timetocreate.Cashassetsdonothavetobepurchasedandmanaged,andtheCDO'stranchescanbepreciselystructured.
HybridCDOshaveaportfolioincludingbothcashassetslikeacashCDOsandswapsthatgivetheCDOcreditexposureotadditionalassets
likeasyntheticCDO.Aportionoftheproceedsfromthefundedtranchesisinvestedincashassetsandtheremainderisheldinreservetocover
paymentsthatmayberequiredunderthecreditdefaultswaps.TheCDOreceivespaymentsfromthreesources:thereturnfromthecashassets,the
GICorreserveaccountinvestments,andtheCDOpremiums.
SingletrancheCDOs
TheflexibilityofcreditdefaultswapsisusedtoconstructSingleTrancheCDOs(bespokeCDOs)wheretheentireCDOisstructuredspecifically
forasingleorsmallgroupofinvestors,andtheremainingtranchesareneversoldbutheldbythedealerbasedonvaluationsfrominternalmodels.
Residualriskisdeltahedgedbythedealer.
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StructuredOperatingCompanies
UnlikeCDOs,whichareterminatingstructuresthattypicallywinddownorrefinanceattheendoftheirfinancingterm,StructuredOperating
CompaniesarepermanentlycapitalizedvariantsofCDOs,withanactivemanagementteamandinfrastructure.Theyoftenissuetermnotes,
commercialpaper,and/orauctionratesecurities,dependinguponthestructuralandportfoliocharacteristicsofthecompany.CreditDerivative
ProductsCompanies(CDPC)andStructuredInvestmentVehicles(SIV)areexamples,withCDPCtakingrisksyntheticallyandSIVwith
predominantly'cash'exposure.

Taxation
TheissuerofaCDOusuallyaspecialpurposeentityistypicallyisacorporationestablishedoutsidetheUnitedStatestoavoidbeingsubjecttoU.S.
federalincometaxationonitsglobalincome.ThesecorporationsmustrestricttheiractivitiestoavoidU.S.taxcorporationsthataredeemedtoengage
intradeorbusinessintheU.S.willbesubjecttofederaltaxation.[87]ForeigncorporationsthatonlyinvestinandholdportfoliosofU.S.stockanddebt
securitiesarenot.Investing,unliketradingordealing,isnotconsideredtobeatradeorbusiness,regardlessofitsvolumeorfrequency.[88]
Inaddition,asafeharborprotectsCDOissuersthatdotradeactivelyinsecurities,eventhoughtradinginsecuritiestechnicallyisabusiness,provided
theissuersactivitiesdonotcauseittobeviewedasadealerinsecuritiesorengagedinabanking,lendingorsimilarbusinesses.[89]
CDOsaregenerallytaxableasdebtinstrumentsexceptforthemostjuniorclassofCDOswhicharetreatedasequityandaresubjecttospecialrules
(suchasPFICandCFCreporting).ThePFICandCFCreportingisverycomplexandrequiresaspecializedaccountanttoperformthesecalculationsand
taxreporting.

Types
A)Basedontheunderlyingasset:
Collateralizedloanobligations(CLOs):CDOsbackedprimarilybyleveragedbankloans.
Collateralizedbondobligations(CBOs):CDOsbackedprimarilybyleveragedfixedincomesecurities.
Collateralizedsyntheticobligations(CSOs):CDOsbackedprimarilybycreditderivatives.
StructuredfinanceCDOs(SFCDOs):CDOsbackedprimarilybystructuredproducts(suchasassetbackedsecuritiesandmortgagebacked
securities).[90]
B)OthertypesofCDOsbyassets/collateralinclude:
CommercialRealEstateCDOs(CRECDOs):backedprimarilybycommercialrealestateassets
Collateralizedbondobligations(CBOs):CDOsbackedprimarilybycorporatebonds
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CollateralizedInsuranceObligations(CIOs):backedbyinsuranceor,moreusually,reinsurancecontracts
CDOSquared:CDOsbackedprimarilybythetranchesissuedbyotherCDOs.[90]
CDO^n:GenerictermforCDO3(CDOcubed)andhigher,wheretheCDOisbackedbyotherCDOs/CDO2/CDO3.Theseareparticularlydifficult
vehiclestomodelbecauseofthepossiblerepetitionofexposuresintheunderlyingCDO.

Typesofcollateral
ThecollateralforcashCDOsinclude:
Structuredfinancesecurities(mortgagebackedsecurities,homeequityassetbackedsecurities,commercialmortgagebackedsecurities)
Leveragedloans
Corporatebonds
Realestateinvestmenttrust(REIT)debt
Commercialrealestatemortgagedebt(includingwholeloans,Bnotes,andMezzaninedebt)
Emergingmarketsovereigndebt
Projectfinancedebt
TrustPreferredsecurities

Transactionparticipants
ParticipantsinaCDOtransactionincludeinvestors,theunderwriter,theassetmanager,thetrusteeandcollateraladministrator,accountantsand
attorneys.Beginningin1999,theGrammLeachBlileyActallowedbankstoalsoparticipate.
Investors
InvestorsbuyersofCDOincludeinsurancecompanies,mutualfundcompanies,unittrusts,investmenttrusts,commercialbanks,investmentbanks,
pensionfundmanagers,privatebankingorganizations,otherCDOsandstructuredinvestmentvehicles.Investorshavedifferentmotivationsfor
purchasingCDOsecuritiesdependingonwhichtranchetheyselect.Atthemoreseniorlevelsofdebt,investorsareabletoobtainbetteryieldsthanthose
thatareavailableonmoretraditionalsecurities(e.g.,corporatebonds)ofasimilarrating.Insomecases,investorsutilizeleverageandhopetoprofit
fromtheexcessofthespreadofferedbytheseniortrancheandtheircostofborrowing.ThisistruebecauseseniortranchespayaspreadaboveLIBOR
despitetheirAAAratings.InvestorsalsobenefitfromthediversificationoftheCDOportfolio,theexpertiseoftheassetmanager,andthecreditsupport
builtintothetransaction.Investorsincludebanksandinsurancecompaniesaswellasinvestmentfunds.
Juniortrancheinvestorsachievealeveraged,nonrecourseinvestmentintheunderlyingdiversifiedcollateralportfolio.Mezzaninenotesandequity
notesofferyieldsthatarenotavailableinmostotherfixedincomesecurities.Investorsincludehedgefunds,banks,andwealthyindividuals.
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Underwriter
TheunderwriterofaCDOistypicallyaninvestmentbank,andactsasthestructurerandarranger.Workingwiththeassetmanagementfirmthatselects
theCDO'sportfolio,theunderwriterstructuresdebtandequitytranches.Thisincludesselectingthedebttoequityratio,sizingeachtranche,establishing
coverageandcollateralqualitytests,andworkingwiththecreditratingagenciestogainthedesiredratingsforeachdebttranche.
Thekeyeconomicconsiderationforanunderwriterthatisconsideringbringinganewdealtomarketiswhetherthetransactioncanofferasufficient
returntotheequitynoteholders.Suchadeterminationrequiresestimatingtheafterdefaultreturnofferedbytheportfolioofdebtsecuritiesand
comparingittothecostoffundingtheCDO'sratednotes.TheexcessspreadmustbelargeenoughtoofferthepotentialofattractiveIRRstothe
equityholders.
Otherunderwriterresponsibilitiesincludeworkingwithalawfirmandcreatingthespecialpurposelegalvehicle(typicallyatrustincorporatedinthe
CaymanIslands)thatwillpurchasetheassetsandissuetheCDO'stranches.Inaddition,theunderwriterwillworkwiththeassetmanagertodetermine
thepostclosingtradingrestrictionsthatwillbeincludedintheCDO'stransactiondocumentsandotherfiles.
ThefinalstepistopricetheCDO(i.e.,setthecouponsforeachdebttranche)andplacethetrancheswithinvestors.Thepriorityinplacementisfinding
investorsfortheriskyequitytrancheandjuniordebttranches(A,BBB,etc.)oftheCDO.Itiscommonfortheassetmanagertoretainapieceofthe
equitytranche.Inaddition,theunderwriterwasgenerallyexpectedtoprovidesometypeofsecondarymarketliquidityfortheCDO,especiallyitsmore
seniortranches.
AccordingtoThomsonFinancial,thetopunderwritersbeforeSeptember2008wereBearStearns,MerrillLynch,Wachovia,Citigroup,DeutscheBank,
andBankofAmericaSecurities.[91]CDOsaremoreprofitableforunderwritersthanconventionalbondunderwritingbecauseofthecomplexity
involved.TheunderwriterispaidafeewhentheCDOisissued.
Theassetmanager
TheassetmanagerplaysakeyroleineachCDOtransaction,evenaftertheCDOisissued.Anexperiencedmanageriscriticalinboththeconstruction
andmaintenanceoftheCDO'sportfolio.ThemanagercanmaintainthecreditqualityofaCDO'sportfoliothroughtradesaswellasmaximizerecovery
rateswhendefaultsontheunderlyingassetsoccur.
Intheory,theassetmanagershouldaddvalueinthemanneroutlinedbelow,althoughinpractice,thisdidnotoccurduringthecreditbubbleofthemid
2000s(decade).Inaddition,itisnowunderstoodthatthestructuralflawinallassetbackedsecurities(originatorsprofitfromloanvolumenotloan
quality)maketherolesofsubsequentparticipantsperipheraltothequalityoftheinvestment.

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Theassetmanager'srolebeginsinthemonthsbeforeaCDOisissued,abankusuallyprovidesfinancingtothemanagertopurchasesomeofthe
collateralassetsfortheforthcomingCDO.Thisprocessiscalledwarehousing.
Evenbytheissuancedate,theassetmanageroftenwillnothavecompletedtheconstructionoftheCDO'sportfolio.A"rampup"periodfollowing
issuanceduringwhichtheremainingassetsarepurchasedcanextendforseveralmonthsaftertheCDOisissued.Forthisreason,someseniorCDO
notesarestructuredasdelayeddrawdownnotes,allowingtheassetmanagertodrawdowncashfrominvestorsascollateralpurchasesaremade.Whena
transactionisfullyramped,itsinitialportfolioofcreditshasbeenselectedbytheassetmanager.
However,theassetmanager'srolecontinuesevenaftertherampupperiodends,albeitinalessactiverole.DuringtheCDO's"reinvestmentperiod",
whichusuallyextendsseveralyearspasttheissuancedateoftheCDO,theassetmanagerisauthorizedtoreinvestprincipalproceedsbypurchasing
additionaldebtsecurities.WithintheconfinesofthetradingrestrictionsspecifiedintheCDO'stransactiondocuments,theassetmanagercanalsomake
tradestomaintainthecreditqualityoftheCDO'sportfolio.ThemanageralsohasaroleintheredemptionofaCDO'snotesbyauctioncall.
Thereareapproximately300assetmanagersinthemarketplace.CDOAssetManagers,aswithotherAssetManagers,canbemoreorlessactive
dependingonthepersonalityandprospectusoftheCDO.AssetManagersmakemoneybyvirtueoftheseniorfee(whichispaidbeforeanyoftheCDO
investorsarepaid)andsubordinatedfeeaswellasanyequityinvestmentthemanagerhasintheCDO,makingCDOsalucrativebusinessforasset
managers.Thesefees,togetherwithunderwritingfees,administrationapprox1.52%byvirtueofcapitalstructureareprovidedbytheequity
investment,byvirtueofreducedcashflow.
Thetrusteeandcollateraladministrator
ThetrusteeholdstitletotheassetsoftheCDOforthebenefitofthe"noteholders"(i.e.,theinvestors).IntheCDOmarket,thetrusteealsotypically
servesascollateraladministrator.Inthisrole,thecollateraladministratorproducesanddistributesnoteholderreports,performsvariouscompliancetests
regardingthecompositionandliquidityoftheassetportfoliosinadditiontoconstructingandexecutingthepriorityofpaymentwaterfallmodels.[92]In
contrasttotheassetmanager,therearerelativelyfewtrusteesinthemarketplace.ThefollowinginstitutionsoffertrusteeservicesintheCDO
marketplace:
ATCCapitalMarkets
BankofNewYorkMellon(note:theBankofNewYorkMellonrecentlyalsoacquiredthecorporatetrustunitofJPMorganwhichisthemarket
shareleader),
BNPParibasSecuritiesServices(note:currentlyservestheEuropeanmarketonly)
Citibank
DeutscheBank
EquityTrust
IntertrustGroup(note:untilmid2009wasknownasFortisIntertrust)
HSBC
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LaSalleBank(RecentlyacquiredbyBankofAmericaPurchasedbyUSBanklate2010)
SanneTrust
StateStreetCorporation
USBank(note:USBankrecentlyalsoacquiredthecorporatetrustunitofWachoviain2008andBankofAmericainSeptember2011)
WellsFargo
WilmingtonTrust:Wilmingtonshutdowntheirbusinessinearly2009.
Accountants
TheunderwritertypicallywillhireanaccountingfirmtoperformduediligenceontheCDO'sportfolioofdebtsecurities.Thisentailsverifyingcertain
attributes,suchascreditratingandcoupon/spread,ofeachcollateralsecurity.Sourcedocumentsorpublicsourceswilltypicallybeusedtotieoutthe
collateralpoolinformation.Inaddition,theaccountantstypicallycalculatecertaincollateraltestsanddeterminewhethertheportfolioisincompliance
withsuchtests.
Thefirmmayalsoperformacashflowtieoutinwhichthetransaction'swaterfallismodeledperthepriorityofpaymentssetforthinthetransaction
documents.Theyieldandweightedaveragelifeofthebondsorequitynotesbeingissuedisthencalculatedbasedonthemodelingassumptionsprovided
bytheunderwriter.Oneachpaymentdate,anaccountingfirmmayworkwiththetrusteetoverifythedistributionsthatarescheduledtobemadetothe
noteholders.
Attorneys
Attorneysensurecompliancewithapplicablesecuritieslawandnegotiateanddraftthetransactiondocuments.Attorneyswillalsodraftanoffering
documentorprospectusthepurposeofwhichistosatisfystatutoryrequirementstodisclosecertaininformationtoinvestors.Thiswillbecirculatedto
investors.ItiscommonformultiplecounselstobeinvolvedinasingledealbecauseofthenumberofpartiestoasingleCDOfromassetmanagement
firmstounderwriters.

Seealso
Assetbackedsecurity
Collateralizedmortgageobligation(alsoknownbyinitialsCMO)
Collateralizedfundobligation
InsideJob(2010film),a2010Oscarwinningdocumentaryfilmaboutthefinancialcrisisof20072010byCharlesH.Ferguson
ListofCDOmanagers
Creditdefaultswap
SingletrancheCDO
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SyntheticCDO

References
1. An"assetbackedsecurity"issometimesusedasanumbrellatermforatypeofsecuritybackedbyapoolofassetsincludingcollateralizeddebtobligationsand
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andCDOs".(italicsadded)(source:Vink,Dennis."ABS,MBSandCDOcompared:anempiricalanalysis"(PDF).August2007.MunichPersonalRePEcArchive.
Retrieved13July2013.)
andsometimesforaparticulartypeofthatsecurityonebackedbyconsumerloans(example:"Asaruleofthumb,securitizationissuesbackedbymortgagesare
calledMBS,andsecuritizationissuesbackedbydebtobligationsarecalledCDO,[and]Securitizationissuesbackedbyconsumerbackedproductscarloans,
consumerloansandcreditcards,amongothersarecalledABS...(italicsadded,sourceVink,Dennis."ABS,MBSandCDOcompared:anempiricalanalysis"
(PDF).August2007.MunichPersonalRePEcArchive.Retrieved13July2013.,
seealso"WhatareAssetBackedSecurities?".SIFMA.Retrieved13July2013."Assetbackedsecurities,calledABS,arebondsornotesbackedbyfinancial
assets.Typicallytheseassetsconsistofreceivablesotherthanmortgageloans,suchascreditcardreceivables,autoloans,manufacturedhousingcontractsand
homeequityloans.")
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TimesBooks,HenryHoltandCompany.p.283.
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23. HowaFormulaIgnitedMarketThatBurnedSomeBigInvestors(http://online.wsj.com/article/SB112649094075137685.html)|MarkWhitehouse|WallStreet
Journal|September12,2005
24. "SIFMA,Statistics,StructuredFinance,GlobalCDOIssuanceandOutstanding(xls)quarterlydatafrom2000toQ22013(issuance),1990Q12013
(outstanding)".SecuritiesIndustryandFinancialMarketsAssociation.Retrieved20130710.
25. Onestudybasedonasampleof735CDOdealsoriginatedbetween1999and2007,foundthepercentageofCDOassetsmadeupoflowerleveltranchesfromnon
primemortgagebackedsecurities(nonprimemeanssubprimeandotherlessthanprimemortgages,mainlyAltAmortgages)grewfrom5%to36%.(source:Anna
KatherineBarnettHartTheStoryoftheCDOMarketMeltdown:AnEmpiricalAnalysisMarch2009(http://www.hks.harvard.edu/mrcbg/students/dunlop/2009
CDOmeltdown.pdf))
26. Othersourcesgiveanevenhigherproportion.Inthefallof2005GenePark,anexecutiveatAIGFinancialProductsdivisionfound,"Thepercentageofsubprime
securitiesintheCDOswasn't10percentitwas85percent!"(source:McLeanandNocera,AlltheDevilsAreHere,2010(p.201)
27. AnemailbyParktohissuperiorisalsoquotedintheFinancialCrisisInquiryReportp.201:"TheCDOoftheABSmarket...iscurrentlyatastatewheredeals
arealmosttotallyreliantonsubprime/nonprimemortgageresidentialmortgagecollateral."
28. Stillanothersource(TheBigShort,MichaelLewis,p.71)says:
"The`consumerloans`pilesthatWallStreetfirms,ledbyGoldmanSachs,askedAIGFPtoinsurewentfrombeing2%subprimemortgagestobeing95%
subprimemortgages.Inamatterofmonths,AIGFP,ineffect,bought$50billionintripleBratedsubprimemortgagebondsbyinsuringthemagainstdefault.And
yetnoonesaidanythingaboutit..."
29. In2007,47%ofCDOswerebackedbystructuredproducts,suchasmortgages45%ofCDOswerebackedbyloans,andonlylessthan10%ofCDOswerebacked
byfixedincomesecurities.(source:Securitizationrankingsofbookrunners,issuers,etc.(http://www.abalert.com/Public/MarketPlace/Ranking/index.cfm?
files=disp&article_id=1044676277)
30. "Moody'sandS&Ptobestow[ed]tripleAratingsonroughly80%ofeveryCDO."(source:TheBigShort,MichaelLewis,p.2078)
31. TheBigShort,MichaelLewis,pp.2078
32. AnnaKatherineBarnettHartTheStoryoftheCDOMarketMeltdown:AnEmpiricalAnalysisMarch2009(http://www.hks.harvard.edu/m
rcbg/students/dunlop/2009CDOmeltdown.pdf)CitedbyMichaelLewisinTheBigShort
33. "SECBroadensCDOProbes".June15th,2011.GlobalEconomicIntersection.Retrieved8February2014."[Includes]graphandtablefromProPublica[that]
showthesizeandinstitutionalreachoftheMagnetarCDOs[versusthewholeCDOmarket]."
34. "CollateralizedDebtObligationsMarket"(Pressrelease).Celent.20051031.Retrieved20090223.
35. Benmelech,EfraimJenniferDlugosz(2009)."TheCreditRatingCrisis"(PDF).NBERMacroeconomicsAnnual2009,(inVolume24).NationalBureauof
EconomicResearch,NBERMacroeconomicsAnnual.
36. TheFinancialCrisisInquiryReport,2011,p.134,section="LeverageisinherentinCDOs"
37. MorgensonandRosnerRecklessEndangerment,2010p.278
38. seealsoFinancialCrisisInquiryReport,p.127
39. 70%."FirmsboughtmortgagebackedbondswiththeveryhighestyieldstheycouldfindandreassembledthemintonewCDOs.Theoriginalbonds...couldbe
lowerratedsecuritiesthatoncereassembledintoanewCDOwouldwindupwithasmuchas70%ofthetranchesratedtripleA.Ratingsarbitrage,WallStreet
calledthispractice.Amoreaccuratetermwouldhavebeenratingslaundering."(source:McLeanandNocera,AlltheDevilsAreHere,2010p.122)
40. 80%."Approximately80%oftheseCDOtrancheswouldberatedtripleAdespitethefactthattheygenerallycomprisedthelowerratedtranchesofmortgage
backedsecurities.(source:TheFinancialCrisisInquiryReport,2011,p.127
41. 80%."InaCDOyougathereda100differentmortgagebondsusuallytheriskiestlowerfloorsoftheoriginaltower......TheybearalowercreditratingtripleB.
...ifyoucouldsomehowgetthemreratedastripleA,therebyloweringtheirperceivedrisk,howeverdishonestlyandartificially.ThisiswhatGoldmanSachshad
cleverlydone.iswasabsurd.The100buildingsoccupiedthesamefloodplainintheeventofflood,thegroundfloorsofallofthemwereequallyexposed.But
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nevermind:theratingagencies,whowerepaidfatfeesbyGoldmanSachsandotherWallStreetfirmsforeachdealtheyrated,pronounced80%ofthenewtower
ofdebttripleA."(source:MichaelLewis,TheBigShort:InsidetheDoomsdayMachineWWNortonandCo,2010,p.73)
TheFinancialCrisisInquiryReport,2011,p.103
TheFinancialCrisisInquiryReport,2011,p.104
MorgensonandRosnerRecklessEndangerment,2010p.280
seealso:BloombergFlawedCreditRatingsReapProfitsasRegulatorsFailInvestorsApril2009(http://noir.bloomberg.com/apps/news?
pid=newsarchive&sid=a6NdKd8CfR2A)
McLeanandNocera,AlltheDevilsAreHere,p.124
PBSCreditandCredibilityDecember2008(http://www.pbs.org/now/shows/446/index.html)
TheFinancialCrisisInquiryReport,2011,p.132
"UnlikethetraditionalcashCDO,syntheticCDOscontainednoactualtranchesofmortgagebackedsecurities...intheplaceofrealmortgageassets,theseCDOs
containedcreditdefaultswapsanddidnotfinanceasinglehomepurchase."(source:TheFinancialCrisisInquiryReport,2011,p.142)
TheMagnetarTrade:HowOneHedgeFundHelpedKeeptheBubbleGoing(SinglePage)April2010(http://www.propublica.org/feature/allthemagnetartrade
howonehedgefundhelpedkeepthehousingbubble)
FinalReportoftheNationalCommissionontheCausesoftheFinancialandEconomicCrisisintheUnitedStates(http://www.gpo.gov/fdsys/pkg/GPO
FCIC/pdf/GPOFCIC.pdf),p.229,figure11.4
TheBigShort(http://books.google.com/books?id=TNarLsnZyPoC&pg=PA95&lpg=PA95&dq=summer+of+2006,+the+Case
Shiller+index+of+house+prices+michael+lewis&source=bl&ots=vNPJ5
udD_&sig=RwEIdDGCuDIjTSCoCrZ5_2mxL60&hl=en&sa=X&ei=xWvoUaj5OqaSyAHcnoDIAw&ved=0CEIQ6AEwAw#v=onepage&q=summer%20of%202006
%2C%20the%20CaseShiller%20index%20of%20house%20prices%20michael%20lewis&f=false),MichaelLewis,p.95
TheFinancialCrisisInquiryReport,2011,p.87,figure6.2
MichaelLewis,TheBigShort,p.947
Lewis,Michael,TheBigShort
"CDOhno!(see"Subprimeperformance"chart)".TheEconomist.8November2007.
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Q1report".Reuters.
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"BearStearnsTellsFundInvestors'NoValueLeft'(Update3)".Bloomberg.20070718.
ManyCDOsaremarkedtomarketandthusexperiencedsubstantialwritedownsastheirmarketvaluecollapsedduringthesubprimecrisis,withbankswriting
downthevalueoftheirCDOholdingsmainlyinthe20072008period.
Eavis,Peter(20071024)."Merrill's$3.4billionbalancesheetbomb".CNN.Retrieved20100430.
"Herd'sheadtrampled".TheEconomist.20071030.
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Aubin,Dena(20080409)."CDOdealsresurfacebutdown90pctinQ1report".Reuters.
nearlyUSD1trillioninmortgagebondsin2006alone
McLean,Bethany(20070319)."Thedangersofinvestinginsubprimedebt".Fortune.

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70. "WarrenBuffetonDerivatives"(PDF).FollowingareeditedexcerptsfromtheBerkshireHathawayannualreportfor2002.fintools.com.
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Externallinks
HowaCDOislikeabottleofChampagne.FromMarketplace(http://marketplace.publicradio.org/videos/whiteboard/uncorking_cdos.shtml)
GlobalPoolofMoneyandCDOs(NPRradio)(http://www.npr.org/templates/player/mediaPlayer.html?
action=1&t=1&islist=false&id=90327686&m=90327669)
TheStoryoftheCDOMarketMeltdown:AnEmpiricalAnalysisAnnaKatherineBarnettHartMarch2009CitedbyMichaelLewisin"TheBig
Short"(http://www.hks.harvard.edu/mrcbg/students/dunlop/2009CDOmeltdown.pdf)
CDODiagramBionicTurtle(http://www.bionicturtle.com/howto/article/cash_collateralized_debt_obligation_cdo/)
https://en.wikipedia.org/wiki/Collateralized_debt_obligation

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CollateralizeddebtobligationWikipedia,thefreeencyclopedia

CDOandRMBSDiagramFCICandIMF(http://www.fcic.gov/hearings/pdfs/20100602aaaassetschart.pdf)
What'saCDO?InteractiveGraphicDecember2007(http://upstart.bizjournals.com/multimedia/interactives/2007/12/cdo.html)
"InvestmentLandfill"(http://goldnews.bullionvault.com/files/Investment_Landfill.pdf)
MezzanineDebt(http://www.mezzaninedebt.org/)
Portfolio.comexplainswhatCDOsareinaneasytounderstandmultimediagraphic(http://www.portfolio.com/interactivefeatures/2007/12/cdo)
TheMakingofaMortgageCDO(http://online.wsj.com/public/resources/documents/infoflash07.html?
project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712)multimediagraphicfromTheWallStreetJournal
JPRIOccasionalPaperNo.37,October2007RiskvsUncertainty:TheCauseoftheCurrentFinancialCrisisByMarshallAuerback
(http://www.jpri.org/publications/occasionalpapers/op37.html)
Collateralizeddebtobligations:who'stoblamewhenthemarketblowsup?Summer,2007
(http://www.entrepreneur.com/tradejournals/article/168163227.html)
Howcreditcardsbecomeassetbackedbonds.FromMarketplace(http://marketplace.publicradio.org/videos/whiteboard/securitization.shtml)
Vink,DennisandThibeault,Andr(2008)."ABS,MBSandCDOCompared:AnEmpiricalAnalysis"[[JournalofStructuredFinance|The
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"Atsunamiofhopeorterror?",AlanKohler,Nov19,2008.(http://www.businessspectator.com.au/bs.nsf/Article/Atsunamiofhopeorterror
LHRJP)
CollateralizedDebtObligationsatWikinvest
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