Collateralized debt obligation

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A guaranteed debt obligation ( CDO ) is a type of security supported by structured assets (ABS). Originally developed as an instrument for corporate debt markets, CDO evolved into a mortgage and mortgage-backed security (MBS) market. Like other private label securities supported by assets, CDO may be considered as a promise to repay investors in the specified order, based on the cash flows collected by the CDO from the collection of bonds or other assets held. CDO "sliced" into "tranche", which "captures" cash flows and principal payments on a seniority basis. If some of the bad loans and cash collected by the CDO are not sufficient to pay all investors, those at the lowest, most "junior" tranches suffer losses first. The latter loses payment from default is the safest, most senior tranches. As a result, coupon payments (and interest rates) vary based on the tranche with the safest/most senior tranche receiving the lowest interest rate and the lowest tranche receiving the highest rate to compensate for the higher default risk. For example, a CDO may issue the following phases in order of security: Senior AAA (sometimes known as "super senior"); Junior AAA; A A; A; BBB; Rest.

Separating special purpose entities - rather than the parent investment bank - issuing CDOs and paying interest to investors. As the CDO was developed, some sponsors repacked the tranche into another iteration, known as "CDO-squared", "CDOs CDOs" or "synthetic CDO".

In the early 2000s, the debt underlying the CDO was generally diversified, but in 2006-2007 - when the CDO market grew to hundreds of billions of dollars - this has changed. CDO collateral becomes dominated by high risk (BBB or A) tranche recycled from other asset-backed securities, whose assets are usually subprime mortgages. The CDO has been called a "machine that supports the mortgage supply chain" for subprime mortgages, and is credited with providing larger incentive lenders to make subprime loans, leading to a 2007-2009 subprime mortgage crisis.

Video Collateralized debt obligation

Market history

Beginner

The first CDO was published in 1987 by bankers at Drexel Burnham Lambert Inc. who is now dead to the now-defunct Imperial Savings Association. During the 1990s, CDO guarantees were mainly corporate bonds and emerging market bonds and bank loans. After 1998 the "multi-sector" CDO was developed by Prudential Securities, but the CDO remains quite unclear until after 2000. In 2002 and 2003, the CDO declined when the rating agencies "were forced to lower hundreds" of securities, but CDO sales grew. - from $ 69 billion in 2000 to about $ 500 billion in 2006. From 2004 to 2007, a $ 1.4 trillion CDO was released.

Early CDOs are diversified, and may include everything from rental debts to aircraft equipment, manufactured housing loans, to student loans and credit card debt. Diversification of borrowers in this "multisector CDO" is a selling point, because it means that if there is a decline in one industry like aircraft manufacturing and their lending fails, other industries such as manufactured housing may not be affected. Another selling point is that CDOs offer returns that are sometimes 2-3 percentage points higher than corporate bonds with the same credit rating.

Description for growth

• The benefits of securitization - Storage banks have an incentive to "secure" the loans they generate - often in the form of CDO securities - because this eliminates loans from their books. The transfer of these loans (along with related risks) to the security-purchase investor in return for money replaces the bank's capital. This allows them to remain in compliance with the capital requirement laws while lending again and incurring additional surcharges.
• Global demand for fixed income investments - From 2000 to 2007, fixed income investment worldwide (ie investments in bonds and other conservative securities) was about twice that in size up to $ 70 trillion, but supply is relatively safe, income-generating investments do not grow as fast, which raises bond prices and lowers interest rates. Wall Street investment banks responded to this demand with financial innovations such as mortgage-backed security (MBS) and collateralized debt obligation (CDO), which are ranked safely by credit rating agencies.
• Low interest rates - Concerns over deflation, dot-com bubble bursts, US recession and US trade deficit kept interest rates low globally from 2000 to 2004-5, according to economist Mark Zandi. Low yields on safe US Treasury bonds create demand by global investors for CDO subprime mortgages backed by relatively high yields but credit ratings as high as Treasuries. The search for this result by global investors has led many people to buy CDOs, even though they live with regret trusting the ratings of credit rating agencies.
• Pricing model - Gaussian copula model, introduced in 2001 by David X. Li, allowed for quick CDO pricing.

Boom subprime mortgage

Around 2005, as the CDO market continued to grow, subprime mortgages began to replace diversified consumer loans as collateral. In 2004, mortgage-based securities accounted for more than half of the collateral in the CDO. According to the Crisis Investigation Report, the CDO is the engine that drives the supply chain of mortgages, promoting an increase in demand for mortgage-backed securities without which the lender will "have little reason to push very hard to make" non- prime. CDOs not only purchase an important part of subprime-backed mortgage-backed securities, they provide cash for initial funding of securities. Between 2003 and 2007, Wall Street spent nearly $ 700 billion in CDOs that included mortgage-backed securities as collateral. Despite the loss of this diversification, the share of CDOs is given the same high-ranking proportion by rating agencies on the grounds that the mortgages are diversified by region and "not correlated" - even though the ratings are lowered after mortgage holders begin to fail.

The rise of "arbitration ratings" - that is, collecting low-level parts to create CDOs - helped boost CDO sales to about $ 500 billion in 2006, with a global CDO market of more than $ 1.5 trillion. CDO is the fastest growing sector of the structured financial market between 2003 and 2006; the number of CDO tranches issued in 2006 (9,278) almost doubled the number of tranches issued in 2005 (4,706).

CDOs, such as mortgage-backed securities, are financed with debt, increasing their profits but also increasing losses if the market reverses course.

Description for growth

Subprime mortgages have been financed by mortgage backed securities (MBS). Like CDOs, MBS is structured into tranches, but securities issuers have difficulty selling lower/lower level mezzanine levels - tranche are valued somewhere from AA to BB.

Since most traditional mortgage investors avoid risk, either because of the limitation of their investment charter or business practice, they are interested in purchasing a higher segment of the loan pile; as a result, the slices are the easiest to sell. A more challenging task is to find a buyer for a more risky part at the bottom of the pile. How a mortgage security is structured, if you can not find a buyer for a lower-grade deduction, the rest can not be sold.

To deal with the problem, investment bankers "recycle" mezzanine tranches, sell them to underwriters who create more structured securities - the CDO. Although the pools that make up CDO collateral may be mostly mezzanine tranches, most tranches (70 to 80%) of CDOs are rated not BBB, A-, etc., but triple A. Minorities of the mezzanine tranches are often purchased by other CDOs, concentrating more low on the lower tranche. (See chart on "The Theory of How the Financial System Creates AAA-rated Assets from Subprime Mortgages".)

As a journalist (Gretchen Morgenson) put it, CDO became "the perfect dump for low-value slices that Wall Street can not sell itself."

Other factors that explain the popularity of CDO include:

• Increased demand for fixed income investments that began early in the decade continues. "The surplus of global savings" leading to "big capital inflows" from abroad helped finance the housing boom, pushing down the US mortgage rate, even after the Federal Reserve Bank raised interest rates to cool the economy.
• Supply generated by "big" costs obtained by the CDO industry. According to "one hedge fund manager who is a big investor in CDO", as much as "40 to 50 percent" of the cash flows generated by assets in CDO goes to "paying bankers, CDO managers, rating agencies, and others who pay. "The rating agencies in particular - those with high ratings of CDO tranches are vital to the industry and paid for by CDO publishers - earn extraordinary profits. Moody's Investors Service, one of the two largest rating agencies, can earn "as much as $ 250,000 to assess a collection of mortgages with assets of $ 350 million, compared to $ 50,000 in fees generated when assessing municipal bonds of the same size." In 2006, revenues from Moody's structured finance division "accounted for 44% entirely" of all Moody's sales. Moody's operating margin "is consistently above 50%, making it one of the most profitable companies available" - more profitable in terms of margins than Exxon Mobil or Microsoft. Between when Moody was separated as a public company and in February 2007, its shares rose 340%.
• Believe in rating agencies. The CDO manager "does not always have to reveal what the securities contain" because the contents of the CDO may change. But this lack of transparency does not affect the demand for securities. Investors "do not buy so much securities, they buy triple-A ratings," according to business journalist Bethany McLean and Joe Nocera.
• Financial innovations, such as credit default swaps and synthetic CDOs. Credit default swaps provide insurers with insurance against possible losses in default tariffs in exchange for payments similar to premiums, making CDO appear "almost risk free" for investors. Synthetic CDOs are cheaper and easier to build than the original "money" CDO. Synthetics "refers" cash CDs, replacing interest payments from MBS tranches with premium payments such as credit default swaps. Rather than providing funds for housing, investors buying synthetic CDOs essentially provide insurance against default mortgages. If the CDO does not perform under the terms of the contract, a counterparty (usually a large investment bank or hedge fund) should pay the other. As underwriting standards worsen and the housing market becomes saturated, subprime mortgage becomes less abundant. Synthetic CDO starts filling for original CDO cash. Because more than one - in fact many - synthetics can be made for the same original reference, the amount of money moving between market participants increases dramatically.

Crash

In the summer of 2006, Case-Shiller's house price index peaked. In California, house prices have more than doubled since 2000 and average house prices in Los Angeles rose to ten times the average annual income. To attract low- and middle-income people to sign up for mortgages, down payments, income documentation is often nullified and interest and principal payments are often postponed upon request. Journalist Michael Lewis exemplifies an unsustainable underwriting practice in Bakersfield, California, where "a Mexican strawberry picker earning $ 14,000 and no English loaned every penny he needs to buy a house for $ 724,000." As a two-year "teaser" mortgage rate - common with people who make a home purchase like this is possible - expired, mortgage payments skyrocket. Refinancing to lower mortgage payments is no longer available because it depends on rising house prices. Mezzanine tranches began to lose value in 2007, by mid-year AA tranches valued at only 70 cents. In the three-A period in October began to fall. However, regional diversification, mortgage backed securities are highly correlated.

Large CDO organizers such as Citigroup, Merrill Lynch and UBS experienced some of the biggest losses, as did financial guarantor like AIG, Ambac, MBIA.

The initial indicator of the crisis came in July 2007 when the rating agency made an unprecedented mortgage-backed mortgage rating (at the end of 2008 91% of the CDO's effect was downgraded), and two very high Bear Stearns hedge funds holding MBS and CDO collapsed. Investors are told by Bear Stearns that they will earn little if any of their money back.

In October and November, CEO Merrill Lynch and Citigroup resigned after reporting billions of dollars worth of losses and CDO downgrades. Since the global market for CDOs drains the pipeline the new issue for CDO slows significantly, and what CDO isselling there is usually in the form of guaranteed loan obligations supported by medium-sized or leveraged bank loans market, rather than the ABS home mortgage. The collapse of CDOs hurts mortgage loans available to homeowners because the larger MBS market relies on purchasing CDOs from the mezzanine tranche.

Although non-prime mortgage defaults affect all mortgage-backed securities, CDO is devastated. More than half - $ 300 billion worth - tranches issued in 2005, 2006, and 2007 were rated safest (triple-A) by rating agencies, downgraded to waste status or lost in 2009. For comparison, only a small fraction course triple-A tranche of Alt-A or subprime mortgage-backed securities suffered the same fate. (See Fixed Effects graph.)

The guaranteed debt obligations also make up more than half ($ 542 billion) of the nearly trillion trillion of losses suffered by financial institutions from 2007 to early 2009.

Criticism

Prior to the crisis, some academics, analysts and investors such as Warren Buffett (known for underestimating CDO and other derivatives as "a weapon of mass destruction, carrying dangers that, while now latent, are potentially lethal"), and former IMF chief economist Raghuram Rajan warned that reduce risk through diversification, CDO and other derivatives spread the risk and uncertainty about the value of the underlying asset more broadly.

During and after the crisis, criticism of the CDO market was more vocal. According to the "Giant Pool of Money" radio documentary, it is a strong demand for MBS and CDO, which lowers home loan standards. Mortgages are required for collateral and around 2003, the supply of mortgages originating from traditional lending standards has been exhausted.

Federal Reserve's head of banking supervision and regulation, Patrick Parkinson, termed "the whole concept of ABS CDO", an "abomination".

In December 2007, journalists Carrick Mollenkamp and Serena Ng wrote about a CDO called Norma made by Merrill Lynch on the orders of Illinois hedge fund Magnetar. It's a bet made specifically for subprime mortgages that are "too far away." Janet Tavakoli, a Chicago consultant who specializes in CDO, says Norma "is a risk junk hair." When it came to market in March 2007, "any savvy investor would throw this... in the trash."

According to reporters Bethany McLean and Joe Nocera, no securities are becoming "more pervasive - or [doing] more damage than guaranteed debt" to create a Great Recession.

Gretchen Morgenson described the securities as "a kind of pile of secret garbage for toxic mortgages [which] created more demand for bad loans than naughty lenders."

CDO extend mania, greatly strengthening the losses investors will suffer and inflating the taxpayer money that will be needed to save companies like Citigroup and American International Group. "...

In the first quarter of 2008 alone, the credit rating agency announced 4,485 CDO rating downgrades. At least some analysts complain that agencies that rely too heavily on computer models with incorrect inputs fail to take into account major risks (such as the collapse of national housing values), and assume the risk of low-ranked trends that make up the CDO will be diluted. whereas in fact, the mortgage risk is highly correlated, and when one mortgage fails, many do so, affected by the same financial event.

They were strongly criticized by economist Joseph Stiglitz, among others. Stiglitz considers these agents to be "one of the key actors" of the crisis that "commits alchemy that alters securities from the F-to the A-rated ratings." The banks can not do what they do without the involvement of rating agencies. " According to Morgenson, the institutions are pretending to turn "garbage into gold."

"As usual, ratings agencies are chronically lagging behind in developments in financial markets and they can barely follow new instruments that start from the brain of Wall Street rock scientists.Fitch, Moody's, and S & P pay their analysts much less than major brokerage firms do and, unsurprisingly end up hiring people who often seek to make friends, accommodate, and impress Wall Street clients in the hope of being hired by them for increased payments.... They [rating agencies] fail to recognize that the underwriting standards of mortgages have decayed or to take into account the likelihood that real estate prices may decline completely undermine the rating agency model and undermine their ability to forecast losses that might be generated by these securities. "

Michael Lewis also announced the transformation of BBB tranches to 80% of triple A CDOs as "dishonest", "artificial" and the result of "fat costs" paid to rating agencies by Goldman Sachs and other Wall Street companies. However, if the collateral is sufficient, the rating will be correct, according to the FDIC.

Synthetic CDOs are particularly criticized, as it is difficult to properly assess (and price) the risks inherent in these types of securities. The harmful effects are rooted in merging and deploying activities at each derivation level.

Others point to the risk of destruction of relationships between the borrower and the lender - removing the lender's incentives to only select creditworthy borrowers - are inherent in all securitization. According to economist Mark Zandi: "Due to a faltering mortgage coupled, diluting the problem into larger pools, incentives for responsibility are underestimated."

Zandi and others also criticized the lack of regulation. "Financial companies are not subject to the same regulatory oversight as banks.The taxpayers are not prepared if they go up [pre-crisis], only their shareholders and other creditors.The financial companies do not make them desperate, grow as aggressively as possible, even if it means lowering or blinking on traditional lending standards. "

Maps Collateralized debt obligation

Concepts, structures, varieties

Drafts

CDOs vary in their underlying structures and assets, but the basic principles are the same. CDO is an asset-supported security type. To create a CDO, a corporate entity is built to hold the asset as a backing package for cash collateral that is sold to investors. The order in which to build a CDO is:

• A special purpose entity (SPE) is designed/built to obtain an underlying asset portfolio. Commonly held basic assets may include mortgage-backed securities, commercial real estate bonds, and corporate loans.
• SPE issues bonds to investors in exchange for cash, which are used to purchase an underlying asset portfolio. Like other private label ABS papers, bonds are not uniform but are published in layers called tranche, each with different risk characteristics. Senior tranche is paid from cash flow from underlying assets before junior tranches and equity tranches. Losses are first borne by equity, then by junior tranche, and finally by senior tranches.

A common analogy compares the cash flow from the CDO securities portfolio (eg mortgage payments from a mortgage-backed bond) to the water flowing to the cups of the investors where the senior part filled first and abundantly flows into the junior branch, then equity gradually. If most mortgages go in default, there is insufficient cash flow to fill all these cups and equity equity investors face losses first.

Risk and profit for CDO investors depends on how the stages are set, and on the underlying asset. In particular, investment depends on the assumptions and methods used to determine the risk and return of the tranche. CDOs, like all asset-backed securities, allow the originator of the underlying asset to transfer credit risk to another institution or to individual investors. Thus, investors should understand how risks to CDO are calculated.

CDO publishers, usually investment banks, earn commissions at the time of issuing and generate management costs over the life of the CDO. The ability to obtain substantial fees from CDOs originating, coupled with the absence of any remaining liability, altered the incentives of the originators in favor of loan volume rather than loan quality.

In some cases, assets held by a CDO consist entirely of layers of equity issued by other CDOs. This explains why some CDOs become totally worthless, because the last layer of paid equity layers in the sequence and there is not enough cash flow from the underlying subprime mortgage (many of which fail) to drip onto the equity layer.

Structure

CDO publishers - typically specialized destination entities - are typically companies established outside the United States to avoid subject to US federal income taxes on their global revenues. These companies should limit their activities to avoid US tax liability; companies deemed to be involved in a trade or business in the U.S. will be subject to federal tax. Foreign companies that only invest and hold a portfolio of US stocks and debt securities are not. Investments, unlike trade or transactions, are not regarded as trading or business, regardless of volume or frequency.

In addition, safe ports protect the CDO issuers who trade actively in securities, even though securities trading is technically a business, provided that issuers' activities do not cause them to be viewed as dealers in securities or engaging in banking, loans or similar businesses.

CDOs are generally taxed as debt instruments except for the most junior classes of CDOs treated as equity and subject to special rules (such as PFIC and CFC reporting). Reporting PFIC and CFC is very complex and requires special accountants to perform these calculations and manage tax reporting obligations.

Type

A) Based on the underlying asset:

• Secured loan obligations (CLOs): CDOs are supported primarily by bank loans with leverage.
• Secured bond obligations (CBOs): CDOs supported primarily by leveraged fixed income securities.
• Rubbered synthetic obligations (CSOs): CDOs supported primarily by credit derivatives.
• Structured finance CDOs (SFCDOs): CDOs are supported mainly by structured products (such as asset-backed securities and mortgage-backed securities).

B) Other types of CDOs with assets/collateral include:

• CDO Commercial Real Estate (CRE CDOs): supported primarily by commercial real estate assets
• Secured bond obligations (CBOs): CDOs supported primarily by corporate bonds
• Guaranteed Insurance Coverage (CIO): supported by insurance or, more commonly, a reinsurance contract
• CDO-Squared: CDO supported mainly by tranche issued by other CDOs.
• CDO ^ n: General terms for CDO ³ (CDO cubed) and higher, where CDO is supported by other CDO/CDO ² /CDO ³ . This is a very difficult vehicle to model because of the possibility of repetition of exposure on the underlying CDO.

Type of collateral

Warranties for CDO cash include:

• Structured finance securities (mortgage-backed securities, home-backed asset-backed securities, commercial mortgage-backed securities)
• Grouped loans
• Corporate bonds
• Real estate investment debt (REIT)
• Real estate commercial mortgage liabilities (including whole loans, B notes, and Mezzanine debt)
• emerging market debt
• Project financial debt
• Trust Preferred securities

Transaction participants

Participants in CDO transactions include investors, underwriters, asset managers, trustees and collateral administrators, accountants and lawyers. Beginning in 1999, the Gramm-Leach-Bliley Act allows banks to participate as well.

Investor

Investors - buyers of CDOs - including insurance companies, mutual fund companies, trust units, investment trusts, commercial banks, investment banks, pension fund managers, private banking organizations, other CDOs and structured investment vehicles. Investors have different motivations to buy CDO effects depending on the tranche they choose. At a more senior debt level, investors can earn better returns than those available on more traditional securities (eg, corporate bonds) of the same rank. In some cases, investors take advantage of leverage and expect to benefit from the spread spreads offered by senior tranches and their borrowing costs. This is true because senior tranches pay spreads above LIBOR despite their AAA ratings. Investors also benefit from the diversification of CDO portfolios, asset manager skills, and credit support built into transactions. Investors include banks and insurance companies as well as investment funds.

Junior tranche investors achieve leveraged, non-recourse investments in the underlying diversification assurance portfolio. Mezzanine records and equity records offer returns that are not available in most other fixed income securities. Investors include hedge funds, banks, and wealthy people.

Underwriter

The person in charge of CDO is usually an investment bank, and acts as a structurer and arranger. Work with asset management companies that choose CDO portfolios, debt and equity structures. This includes choosing a debt to equity ratio, measuring each stage, establishing coverage and testing the quality of collateral, and working with credit rating agencies to get the desired ratings for each stage of debt.

The main economic consideration for underwriters who consider bringing new transactions to the market is whether the transaction can offer sufficient return to equity shareholders. Such determinations require a return estimate after the default offered by the bond portfolio and compare it with the cost of funding the CDO rating record. The spread spread should be large enough to offer potential IRRs of interest to shareholders.

Other guarantor responsibilities include working with law firms and creating special purpose law vehicles (usually trusts incorporated in the Cayman Islands) that will buy assets and issue CDO sidewalks. In addition, the underwriter will work with asset managers to determine post-closure trading restrictions to be included in CDO transaction documents and other files.

The final step is to set the price of the CDO (ie, arrange the coupon for each stage of debt) and put the tranche with the investor. Priority in placement is to seek out investors for risky equity stages and junior debt loans (A, BBB, etc.) from CDO. It is normal for asset managers to keep a share of the equity section. In addition, underwriters are generally expected to provide some kind of secondary market liquidity for CDOs, especially the more senior tranches.

According to Thomson Financial, underwriters before September 2008 were Bear Stearns, Merrill Lynch, Wachovia, Citigroup, Deutsche Bank and Bank of America Securities. CDOs are more favorable to underwriters than conventional emissions guarantees due to the complexity involved. The guarantor pays the fees when the CDO is issued.

Asset manager

The asset manager plays a key role in every CDO transaction, even after the CDO is issued. Experienced managers are vital in the development and maintenance of CDO portfolios. Managers can maintain CDO portfolio credit quality through trading as well as maximize recovery rates when defaults on underlying assets occur.

In theory, asset managers must add value in the way described below, although in practice, this did not occur during credit bubbles in the mid-2000s (decades). In addition, it is now understood that structural defects in all asset-backed securities (the profit generator of loan volume rather than loan quality) make the next participant role peripheral to the quality of the investment.

The role of asset manager begins in the month before the CDO is issued, the bank usually provides financing to the manager to purchase some collateral assets for future CDOs. This process is called warehousing.

Even on the issue date, asset managers will often not complete the CDO portfolio development. The period of "ramp-up" after issuance for the rest of the purchased assets may be extended for several months after the CDO is issued. For this reason, some senior CDO records are prepared as a pending withdrawal record, enabling asset managers to withdraw cash from investors as collateral purchases are made. When the transaction is fully defeated, the loan portfolio has been originally chosen by the asset manager.

However, the role of asset manager continues even after the ramp-up period ends, albeit in a less-active role. During the CDO "reinvestment period", which is usually extended several years after the date of issuance of the CDO, asset managers are authorized to reinvest the proceeds by purchasing additional debt securities. Within the limits of trade restrictions specified in the CDO transaction documents, asset managers may also trade to maintain the quality of CDO portfolio credit. Managers also have a role in redemption of CDO records through an auction call.

There are about 300 asset managers in the market. The CDO Asset Manager, like other Asset Managers, may be more or less active depending on the personality and prospectus of the CDO. The Asset Manager makes money based on the senior fees (paid before one of the CDO investors is paid) and the manager's subordinated and equity investment in the CDO, making the CDO a profitable business for asset managers. This cost, together with underwriting fees, administration - is approximately 1.5 - 2% - based on the capital structure provided by equity investments, based on reduced cash flow.

Trustee and collateral administrator

The trustee holds the property rights to CDO assets for the benefit of "irresponsible persons" (ie, investors). In the CDO market, the guardian also usually serves as the collateral administrator. In this role, the collateral administrator produces and distributes report noteholder, performs various compliance tests related to the composition and liquidity of asset portfolios in addition to building and implementing the waterfall payment model priorities. Unlike the asset manager, there are relatively few guardians in the market. The following institutions offer a trustee service on the CDO market:

• Bank of New York Mellon (note: Bank of New York Mellon acquired JP Morgan's corporate trust unit),
• BNP Paribas Securities Services (note: currently serving the European market only)
• Citibank
• Deutsche Bank
• Trust of Equity
• Intertrust Group (note: until mid-2009 known as Fortis Intertrust; Acquisition of ATC Capital Markets in 2013)
• HSBC
• Sanne Trust
• State Street Corporation
• US Bank (note: The US Bank acquired Wachovia's corporate trust unit in 2008 and Bank of America in September 2011, which had previously acquired LaSalle Bank in 2010, and is the current market share leader)
• Wells Fargo
• Wilmington Trust: Wilmington closed its business in early 2009.

Accountant

Underwriters will typically hire an accounting firm to conduct due diligence on the CDO's debt portfolio. This requires the verification of certain attributes, such as credit ratings and coupons/spreads, of any security of collateral. Source documents or public sources will usually be used to bind information to collateral collections. In addition, accountants typically calculate a specific assurance test and determine whether the portfolio matches the test.

The Company may also conduct cash flows where the transaction waterfall is modeled per payment priority specified in the transaction document. The yield and weighted averages of bonds or debt securities issued are calculated based on the modeling assumptions granted by the underwriter. At each payment date, an accounting firm may work with the trustee to verify the distribution scheduled for the account holder.

Attorney

The lawyer ensures compliance with applicable securities laws and negotiates and prepares transaction documents. The lawyer will also prepare a bidding document or prospectus whose purpose is to comply with the statutory requirements to disclose certain information to the investor. This will be circulated to investors. It is common for some advisors to engage in an agreement because of the number of parties from a CDO from an asset management company to an underwriter.

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In popular media

In the biopic of 2015 The Big Short , the CDO is portrayed metaphorically as "dog shit wrapped in cat litter".

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See also

• Asset supported security
• Bespoke portfolio (CDO)
• Obligated mortgage liability (CMO)
• Secured funds obligation (CFO)
• Loaned liability (CLO)
• Inside Job (film 2010), Oscar-winning documentary 2010 about the 2007-2010 financial crisis by Charles H. Ferguson
• List of CDO managers
• Swap credit defaults
• Single-tranche CDO
• Synthetic CDO
• The Big Short (2015 film)

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References

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External links

• Global Pool of Money (NPR radio)
• The CDO Meltdown Market Story: Empirical Analysis-Anna Katherine Barnett-Hart-March 2009-Quoted by Michael Lewis in "The Big Short"
• CDO Diagram and Explanation
• CDO and RMBS Diagram-FCIC and IMF
• "Stockpiling Investment"
• Portfolio.com explains what CDO is easy to understand for multimedia graphics
• Creating a CDO Mortgage multimedia graphic from The Wall Street Journal
• JPRI Occasional Paper No. 37, October 2007. Risk vs. Uncertainty: Cause of Current Financial Crisis By Marshall Auerback
• How credit cards become asset backed bonds. From Marketplace
• Vink, Dennis and Thibeault, Andrà © © (2008). "ABS, MBS and CDO Compared: Empirical Analysis", Structured Financial Journal
• "Tsunami of hope or terror?", Alan Kohler, November 19, 2008.
• " Warnings " - an episode on PBS that addresses some of the causes of the 2007-2008 financial crisis including the CDO market
• Guaranteed Payable Liabilities in Wikinvest

Source of the article : Wikipedia