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Who Owns Troublesome CDO/CMOs?

Posted By Barry Ritholtz On June 26, 2007 @ 1:48 pm In Data Analysis,Derivatives,Financial Press,Hedge Funds,Real Estate | Comments Disabled

There is an interesting article in July Bloomberg Mag ("Toxic Debt")about who owns the CDOs and CMOs now causing so much trobule at Bear Stearns, and possibly elsewhere.

Its only in the dead tree version, so there is only so much I can link to. If you pay for a Bloomberg terminal, you are entitled to the mag as part of your sub (just ask for it). There were four stories in the magazine:

The Subprime Sinkhole

Subprime Money Trail

The Ratings Charade

The Poison in Your Pension

Here is a short excerpt:

"Worldwide sales of CDOs—which are packages of securities backed by bonds, mortgages and other loans—have soared since 2003, reaching $503 billion last year, a fivefold increase in four years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches. They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out. . .

Because CDO contents are secretive, fund managers can’t easily track the value of the components that go into these bundles. “You need to monitor the collateral in your investment and make sure you’re comfortable there will be no defaults,” says Satyajit Das, a former Citigroup banker who has written 10 books on debt analysis. Most investors can’t do that because it’s extremely difficult to track the contents of any CDO or its current value, he says. About half of all CDOs sold in the U.S. in 2006 were loaded with subprime mortgage debt, according to Moody’s and Morgan Stanley. Since CDO managers can change the contents of a CDO after it’s sold, investors may not know how much subprime risk they face, Das says."

Two things struck me about the magazine coverage: First, the CMO issue is far more widespread than many people realize. Apparently, cheap money made a highly leveraged reach for yield ever more appealing. Lots of surprising players seem to have got sucked in.

Second, the incongrously "fun" graphics Bloomberg used throughout — they reminded me of a comic book, which is so contra-indicated by the seriousness of the subject matter (maybe they wanted to add some levity to a serious subject).

Its really noticeable in the magazine, but it here are the two graphics I pulled from the online PDF:


Cdo_buyers [1]

Rating_cdos [2]

Graphics courtesy of Bloomberg Magazine [3]

I’m taking Betty and Veronica [4] down to Pop’s Sweet shop after the bell if anyone wants to join me . . . 


The Poison in Your Pension [3]
David Evans
Bloomberg Magazine, July 2007

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2007/06/who-owns-troublesome-cdocmos/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/2007/06/26/cdo_buyers.png

[2] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/2007/06/26/rating_cdos.png

[3] Bloomberg Magazine: http://www.bloomberg.com/news/marketsmag/pensions.pdf

[4] Betty and Veronica: http://www.archiecomics.com/

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