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".

2 comments:

  1. Anonymous28 December 2007 at 12:23

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

    ReplyDelete
  2. Sackerson28 December 2007 at 13:18

    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!

    ReplyDelete

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