Word: cdos
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...vanilla mortgage-backed securities (MBS), which are based on thousands of home loans, isn't easy. But MBS are only the tip of the troubled bank iceberg. Lurking below are bonds that are more complicated, and much more difficult to value. Among the most confounding are collateralized debt obligations (CDOs...
...that, by and large, was how the biggest players in the financial-services sector acted in the run-up to the crisis. Taking on risk from instruments like credit-default swaps and collateralized debt obligations (CDOs) was treated as a profit center, often with little oversight of the mathematical models that spit out numbers about what it was all worth. The models proved spectacularly wrong because they precluded the possibility of an outsize event. Once big shocks, like declining home prices, started hitting, the models broke down. According to a report by a group of U.S. and international regulators, while...
...when the Canadian bank Toronto-Dominion got out of structured products, including CDOs and interest-rate derivatives, CEO Ed Clark was pilloried for leaving profit on the table. Clark, who has a Ph.D. in economics from Harvard, made the decision because he couldn't comprehend, to his satisfaction, the credit and equity products that were being traded at the firm. So he decided to quit the business--a move that kept his bank in the black while others suffered. "I'm an old-school banker," he later said. "I don't think you should do something you don't understand...
...signed last week, in which Paulson and Co. were given wide berth to do what they needed to ease the financial panic that all but froze credit markets. Much of the discussion, and the planning, has revolved around how the government would buy up the toxic securities such as CDOs (collateralized debt obligations) that are now poisoning bank balance sheets. The thinking has been that once financial institutions can unload this trash on the government, the gears of commerce will move again. But that takes time to pull off. "It's an inefficient way to inject capital," says Campbell Harvey...
...processor Pilgrim's Pride, is now struggling with financing because credit markets have seized. There are 1,500 jobs in the balance if, say, Pilgrim's Pride can't make payroll because it doesn't have access to funds. It is unlikely that any of those workers invested in CDOs. It is certainly possible that some of them are in over their heads on subprime loans. Some 63% of Georgia's subprime loans were late over the past 12 months; 6.2% are in foreclosure, according to the Federal Reserve...