Here is a blast from the past: Precisely 4 years ago on June 30th, we took a closer look  at CDOs. It was in response to a remarkably sanguine question: CDOs: what’s the big deal?

We thought they were a big deal, and posed 10 Questions About CDOs.

Here are my 10 questions:

1. What would have happened had Bear Stearns simply let their two funds, High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund, dissolve?

2. If CDOs are not priced to market, what are the actual values of these holdings?

3. How levered up are the funds that own the bulk of the CDOs? 10-to-1? 20-to-1? More?

4. How many Hedge funds are or have been taking quarterly or annual performance profits, based in whole or in part, on hoildings that have been marked to a theoretical value (“Mark-to-Model”) versus an actual value (“Mark-to-Market”)?

5. Liquidity has been a driving force behind M&A activity, share buybacks, and leveraged buyouts. Might the CDO situation somehow impact liquidity?

6. Might a liquidation in a CDO/illiquid derivative fund spread to other asset classes?

7. How widely held are the toxic CDO tranches in funds that are self-decribed as “conservative” or “risk averse?”

8. How accurate are the major ratings firms (Moodys, Standard & Poors, Fitch) assessment
of these products. Are these outfits arm’s length objective raters, or
are they merely corporate whores who play for pay?

9. After the final chapter is written on CDOs, what might the total losses on the $250 Billion in quarterly CDOs that Wall Street has created actually be? 10 Billion? 100 Billion? 1 Trillion?

10. How much will systemic confidence be impacted if there is a
series of large fund failures due to CDOs? What impact might that have on the rest of the markets?

The point being: All that was required to recognize the brewing trouble was a willingness to ask questions, ignore traditional assumptions, question authority, and challenge what the “experts” were saying.

What trouble might be brewing now . . . ?

Category: Bailouts, Derivatives

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “June 2007: 10 Questions About CDOs”

  1. “…The point being: All that was required to recognize the brewing trouble was a willingness to ask questions, ignore traditional assumptions, question authority, and challenge what the “experts” were saying…”

    some things, by themselves, should be contemplated..(the above being a prime example..)


    “Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep, and sheep get slaughtered. ”

    and, at the minimum, People should, really, wonder how this “Industry”, ever, grew so Large..

  2. murrayv says:

    Asking those questions in June of ’07 was astonishingly prescient. I wish there had been a concerted effort to answer them.
    What questions should we be asking about what instrumenst now? How about CDSs?

  3. 873450 says:

    11. How much impact did “synthetic” CDO engineering contribute to collapsing subprime?

  4. biglot says:

    From the internet: The FBI accurately described mortgage fraud as “epidemic”. They did so at such an early point, September, 2004, that the financial crisis could have been averted had the Bush administration acted with even minimal competence.

  5. reedsch says:

    This post should officially earn you a Prophet’s Staff. Every point was on target to a remarkable degree. A prudent person could have protected themselves somewhat, as I suspect even BR would not have been able to estimate to full potential of the downside. But it would have taken serious cojones to profit from those most prescient observations.

    Imagine you have a small pain in your side, and you go to two different doctors. One doctor says that you may only live 6 months more. The other says that it is a small matter and nothing to worry about. Human nature being what it is, which one would you strongly tend to believe?

  6. gman says:

    Sell CDOs!
    1. In good times no defaults..bonus out the premium.
    2 In slightly bad times like now, you can pretend and austerity your way around “credit events” like Greece. Bonus out the premium.
    3. In really bad times the US government comes around and make everbody who is anybody whole. Bonus out the premium.

    Start again at 1 Repeat!