Collateralised debt obligation

Financial Weapons of Mass Destruction™ A guide to the tools of our trade. →Go uptown Top Trumps®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 Index: Click ᐅ to expand: FWMD Master Agreements Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

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

• CDO²
• Credit derivatives
• Financial weapons of mass destruction