Friday, December 28, 2007

Anatomy of a CDO

The Wall Street Journal provides a grisly visual dissection of a subprime mortgage package - thanks to The Contrarian Investor for the lead.

If I follow correctly, the trickery seems to come in step 4, where a CDO largely composed of middling-rated mortgage risk sells bits of itself with unreasonably optimistic ratings attached. "Skimmed milk masquerades as cream".


Anonymous said...

For those who enjoy reading, we recommend this article from Platinum Asset Management.

Sackerson said...

Thanks - the first page of that article has a bit on regulation Q that relates nicely to our £100-billion Northern Rock debacle:

"Just imagine running a bank when your assets are long-dated mortgages yielding seven percent while your deposit costs rise to twelve percent"

... I shall read on!