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Many of these loans end up in collateralised debt obligations (CDOs, which slice up bundles of referenced loans into tranches of different riskiness for different investors).
How many people understood the business model of Wall Street banks that claimed to be making billions of dollars by dealing in collateralised debt obligations, credit default swaps and option-ARM mortgages?
One indication of the potential scope of problems facing firms that did business with Refco came from Moody's, a rating agency, which said on October 19th that at least 87 transactions in collateralised debt obligations that it had rated had been affected by Refco's bankruptcy.
That is less than six months of projected profits, but it ignores potential losses in south-east Europe and the Baltics, as well as the risks buried in collateralised synthetic obligations.Moreover, adding that much capital would still leave the banks with highly leveraged balance-sheets, holding over $36 of assets for every dollar of equity.
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Those of us who subsequently lost a large chunk of our private savings because of the unbridled deregulation of financial markets are grateful that Mr Bush was stopped from investing our pensions in collateralised-debt obligations and subprime mortgages.David Wright San Francisco* SIR – It is not true that "the left's fondest ambitions" became law in the health-care act.
Litigation is another huge worry: Citigroup agreed this week to pay $285m to settle claims by the Securities and Exchange Commission (which the bank neither admits nor denies) that it misled investors in a collateralised-debt obligation.Some wonder whether there is even a long-term future for certain banks.
ETVs are typically characterised by investments in underlying raw materials or futures, collateralised with Treasury bills.In Europe synthetic funds make up around half of the ETF sector by assets.
The fastest growth came from private-equity groups, which raised $53 billion in three months, two-thirds more than a year earlier.As in other parts of the debt markets, the liquidity has been fed by the large number of investors willing to buy tranches of collateralised debt obligations or, in the case of leveraged lending, collateralised loan obligations, a market which has rallied since 2002.
The Securities and Exchange Commission alleges that the bank deceived investors in a synthetic collateralised-debt obligation built on mortgage assets, by not disclosing that Paulson, a hedge fund that had some say in choosing which securities went into the product, would profit if the CDO performed poorly.
Would collateralised debt obligations be traded in for Collateralised Unpaid Debt?
(For those who are still baffled, they are Collateralised Debt Obligations and Structured Investment Vehicles).The lesson of the year, in retrospect, was that our complex, interlinked global financial system has its drawbacks.
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