CDOS

Deutsche Bank was an aggressive dealer in CDOs in the period when the market was beginning to crack.

He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt.

Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so.

For much of the mortgage boom, Merrill was able to sell the bulk of the CDOs it underwrote to investors all over the world.

Modern finance is supposed to be all about measuring risks, yet corporate and mortgage-backed CDOs were a leap in the dark.

Shockingly, two-thirds of that stemmed from supposedly triple-A CDOs, which by then were deemed to be worth only half of their face value.

Goldman has even referred to the investors who bought its CDOs as "among the most sophisticated mortgage investors in the world" .

CDOs were so complex that they had to be assessed using specially designed models, which had various faults.

(On occasion, each of a pair of CDOs would buy a tranche of the other, creating a "loop" that slowed analysis).

CDOs were one of the main vehicles through which risky US mortgages were repackaged and sold to investors around the world .

Still, selling complex CDOs is not the equivalent to making a market in stocks or other widely traded securities.

The bottom tiers of these CDOs have been called "toxic waste" .

It definitely embraced them with Abacus, keeping IKB in the dark both about Paulson and its own view of mortgage CDOs.

So far, Morgan Stanley estimates that about $123bn of these defaulted CDOs have been liquidated.

Hundreds of billions of dollars of CDOs have defaulted, but the structures can only be liquidated if the underlying collateral can be sold.

But faith in the financial alchemy of this single currency has spectacularly crumbled, just as faith in those CDOs fell apart.

They would never have taken such a punt on high- yield securities or equity tranches of collateralized debt obligations (CDOs ) .

They also lent buyers much of the money to bid for CDOs, certain that the securities were a sound investment.

These were precursors to CDOs, the pools of mortgage-backed securities that were to wreak havoc on the global financial system years later .

Now, the estimated market value of the CDOs is at least $45bn, according to several people with direct knowledge of the portfolio.

At the time of the Fed intervention, the value of the CDOs insured by AIG was falling dramatically and AIG was facing a credit downgrade.

We know John Paulson made $1 billion betting against mortgages using one of these CDOs.

The losses the banks began to take against their holdings of CDOs were staggering.

It could promote the interests of favoured investors, use CDOs to hedge its own loan book or even take a trading position.

Merrill has suffered heavy losses on its holdings of CDOs as a result of the credit market turmoil.

Lord knows, the Obama Administration is not going to bail out hedge funds, CDOs, private equity firms (Cerberus? ), or Donald Trump.

Analysts believe AIG originally valued these contracts by looking to prices supplied for a pool of CDOs, among other factors.

After all, "exotic" ETFs are still a small proportion of the overall market, and the instrument is not as inherently risky as, say, CDOs.

CDOs offer higher yields than similarly rated mortgage-backed bonds, but are more susceptible to losses if the underlying loans decay.

Derivatives known as collateralized debt obligations (CDOs)are a clever way to satisfy every taste.

To make matters worse, bond insurers, which rate America's $2. 5 trillion municipal-bond market, are also up to their necks in CDOs.

As the CDOs declined in value, AIG had to pay out cash to the CDO owners, including investment banks.

Paulson was able to exert the influence it did because of the informal way in which Goldman and other investment banks put CDOs together.

Structured credit bankers specialising in cash CDOs will be the hardest hit this year as the impact of market turmoil takes its toll .

AIG came to specialise in insuring holders of what it believed were the safest CDOs, known as "super-senior" tranches (see below).

Traditional CDOs bundled bonds into portfolios and then split those portfolios into tranches, depending on investors' appetite for risk.

Often, CDOs included not just mortgage-backed securities, but tranches of other CDOs, each maybe incorporating further CDOs.

In presentations to investors this year, it emphasised how thoroughly its AIG Financial Products arm assessed the risks of insuring CDOs.

Hence the decision to move into the complex business of insuring CDOs and playing a role in their construction.

Bear Stearns last month revealed large losses at two hedge funds that owned subprime-related CDOs - but had trouble quantifying the losses.

Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets.

The Magnetar controversy centres on how it financed its bet against the triple-A tranches of CDOs that Citi trusted.

Joseph Mason, co-author of the critical study on structured ratings, thinks losses on recently assembled CDOs could top $100 billion.

If the funds lost most of their money in May and June, they must have held positions other than highly rated CDOs.

As long as these CDOs are not liquidated, they typically allow for payments to service providers, including ratings agencies.

Instead, Goldman would have been exposed to further declines in the value of the CDOs.

The order had "come down from on high that it was a good thing to buy CDOs" .

CDOs built solely out of subprime mortgage debt became the rage.

I got an offer, ironically from Linman Brothers to go work in CDOs, so it will pay six-figure salary, real job and I actually have money.

Yet the idea behind modelling got garbled when pools of mortgages were bundled up into collateralized-debt obligations (CDOs).

According to a recent report from ProPublica, there were 26 deals in which Magnetar, a hedge fund, both sponsored CDOs and bet against them.

AIG had assumed that the insurance would be valued more highly than the CDOs.

At worst, Moody's says, the vast majority of tranches insuch CDOs would be downgraded to junk-bond status.

The ratings agencies may move shortly to reassess CDOs, but the investment banks have seen no deterioration in their own ratings.

Overall, commercial-real-estate write-downs in the first quarter are expected to rival those for CDOs and leveraged loans.

Of more complex products, collateralised-debt obligations (CDOs) downgrades have affected just 1% of securities by value.

Worse, some of Wall Street's most lucrative recent creations, such as conduits and CDOs, are suddenly out of favour.

The rating agencies that gave CDOs such absurdly high ratings, though not named in the ABACUS case, should also worry.

CDOs are pools of debt that are sliced into tranches of varying risk and return that sold onto investors.

The one bank I've found that did analyse CDOs based on mortgages from the bottom up was Goldman Sachs.

At first blush, this might seem surprising. After all, during the boom years for CDOs, the two products were closely intertwined.

Not least because ETF's (unlike CDOs) are often sold to retail investors.

Just weeks earlier, the CDOs had been valued at $11bn on Merrill's balance sheet.

Decoded: Goldman would sell CDOs stuffed with other investment banks' toxic waste, allowing them to short it.

Banks also structured CDOs that were seemingly designed to incur losses for long investors.

"The CDOs were the source of the vast majority of losses at Merrill, " Thain told us in December.

bility of using CDOs to offload the toxic risks in rivals' balance sheets on to clients.

The potential damages are huge: on average, these CDOs lost more than a billion dollars each.

Would Mr Greenberg, whose nose for risk was legendary, have limited the exposure to CDOs?

One incentive has been the higher yield on top-rated CDOs, compared with similarly rated bonds or loans.

Investors in the CDOs are said to have lost more than $1 billion.

By late 2006 the cost of default swaps on subprime CDOs had jumped sharply.

The recent rally has been particularly marked for CDOs backed by corporate bonds and loans.

The issuers of CDOs asked rating agencies to assess their quality.

Likewise, it was hard to gauge the exposures to "tail" risks built up by sellers of swaps on CDOs such as AIG and bond insurers.

I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.

Through the alchemy of Mezzanine-CDOs.

Both Citiand Merrill, for instance, held on to the senior tranches of CDOs, which havesince gone bad.

The people familiar with the portfolio said that it would be difficult to sell all the CDOs because they are generally illiquid.

One reason why large banks crumbled last year was that many were carrying vast quantities of highly-rated CDOs and other toxic paper.

We know Goldman made money selling synthetic CDOs.

CDOs aren't standardized products, and their values can differ based on a host of factors.

Merrill recorded $9. 4 billion of write-downs from exposure to CDOs, residential mortgages, bond insurers and other investments.

Gemstone 7 is a nasty story of deception at the fourth-largest issuer of CDOs in the US.

There are hundreds of non-Goldman CDOs that no one has yet investigated.

That $5. 6 billion represents the difference between collateral Goldman already held and the CDOs' par value.

But, as with CDOs, this growth has come at a cost.

By comparison, he foresees first-quarter write-downs of $10 billion in CDOs and $5. 8 billion in leveraged-loan commitments.

A rapid sale of CDOs could also depress their prices.

it is shared with those who own structured products, such as collateralized-debt obligations (CDOs) that might buy mortgage-backed loans.

Between 2004 and 2007, the world of CDOs and credit derivatives exploded at a stunning pace, creating fat profits for some banks.

Better mortgages and CDOs are selling for 70 cents on the dollar.

Where to CDOs make their returns?

Monday, AIG said it provided protection on $13. 98 billion of 'multisector' CDOs with Goldman.

So structured products such as CDOs looked a promising diversification.

The banks so liked CDOs that they held on to a lot of their own issues, even when the idea behind the business had been to sell them on.

On July 29, Merrill announced the sale of $31bn in CDOs to Lone Star Funds for $6. 7bn.

Between 2005 and 2007, investment banks issued about $1, 100bn of CDOs.

Most investors were happy to buy products such as CDOs because they trusted the value of credit ratings.

CDOS Concurrent Disk Operating System