Collateralised debt obligation: Difference between revisions

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[[Collateralised debt obligation]] — three words which taken separately seem harmless and rather nice, but when put together convoke Satan and all his hellish angels of [[leverage]]. when bundled together and sliced up, make a [[CDO squared]] which really is the stuff of nightmares.
{{a|fwmd|{{CDO - FWMD}}}}[[Collateralised debt obligation]] — three words which taken separately seem harmless and rather nice, but when put together convoke Satan and all his hellish angels of [[leverage]]. when bundled together and sliced up, make a [[CDO squared]] which really is the stuff of nightmares.
 
Can be made out of credit derivatives rather than actual loans — in which case it is a [[synthetic CDO]], or out of the junior tranches of other [[Collateralised debt obligation|CDO]]s they could not for some reason shift off the balance sheet, in which case it is a [[CDO squared|CDO ''squared'']]. Doesn’t sound like a good idea, huh? Wasn’t. This didn’t stop Rating Agencies rating them triple A!
 
That didn’t stop them from doing CDOs of [[CDO squared]]s, which were, of course, CDO ''cubed'' — or Rating Agencies rating ''them'' triple A.
 
Who would have thought, a few short months later, the entire financial system would collapse?


{{sa}}
{{sa}}
*[[CDO²]]
*[[Credit derivatives]]
*[[Credit derivatives]]
*[[Financial weapons of mass destruction]]
*[[Financial weapons of mass destruction]]

Latest revision as of 20:28, 24 September 2024

Financial Weapons of Mass Destruction
A guide to the tools of our trade.
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Financial Weapons of Mass Destruction®



CDO

Bowie started it. Lehman finished it. No-one enjoyed it.

Docs Full blown 144A standalone. Hundreds of thousands of little words, and not one of them will help you. 9
Amendability The manager might make some portfolio substitutions, but who do you think that will help? 8
Collateral Ninja collateral. Literally. 7
Transferability Yeah but no. Made worse because they look so transferable. 7
Leverage Funding-wise, no. Money down up front. Risk wise? Hell yeah. 7
Fright-o-meter But the ratings! The ratings! 8

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Collateralised debt obligation — three words which taken separately seem harmless and rather nice, but when put together convoke Satan and all his hellish angels of leverage. when bundled together and sliced up, make a CDO squared which really is the stuff of nightmares.

Can be made out of credit derivatives rather than actual loans — in which case it is a synthetic CDO, or out of the junior tranches of other CDOs they could not for some reason shift off the balance sheet, in which case it is a CDO squared. Doesn’t sound like a good idea, huh? Wasn’t. This didn’t stop Rating Agencies rating them triple A!

That didn’t stop them from doing CDOs of CDO squareds, which were, of course, CDO cubed — or Rating Agencies rating them triple A.

Who would have thought, a few short months later, the entire financial system would collapse?

See also