CDO’s- The Garbage Dump Of Securitization
When CDO’s were first introduced I thought maybe I just did notunderstand. You take junk that nobody wants, dump it into a box,mix it all together and out comes AAA paper. Magic. When I was veryactive in the early stages of developing CMBS, we always knew therewas an issue of what to do with the low level paper and how do yousecuritize loans that did not have any real cash flow. If thiscould be solved then the volumes and profits would increasesubstantially. CDO’s to the rescue. As one of my capital marketsfriends recently commented, the definition of a good banker is onewho dreams up ways to get around whatever the latest rules and regsare.
Despite the massive losses suffered by CDOs’ and their sponsorsover the past two years, I hear that they may be making a comeback. That would be terrible. A CDO is by design, an instrument ofassured deception and destruction. If the loan was made to a solidcash flowing asset, and if there was true debt cover in stressscenarios, then the paper would be in a true CMBS pool. The onlyreason to have a CDO is to have a place to dump the risk and thejunk, otherwise there is no need for it.
Continue Reading for Free
Register and gain access to:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
*May exclude premium content
Already have an account?
Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.