Current Affairs

Two cows and bunch of CDOs

By Brij ⋅ August 16, 2007 ⋅  Email This Post ⋅  Print This Post ⋅ Post a comment

We all know that in Wall street these days some very rich people are becoming somewhat less rich due to some technical corrections. I tried explaining to my wife how the whole process is unraveling but I failed when it came to details.

Thankfully we have smart folks like Roubini to convert all that CNBC-breathlessness into layman language -

First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading investment grade rating by the credit rating agencies; then you create synthetic CDOs out of the same underlying RMBS; then you create CDOs of CDOs (or squared CDOs) out of these CDOs; and then you create CDOs of CDOs of CDOs (or cubed CDOs) out of the same murky securities; then you stuff some of these RMBS and CDO tranches into SIV (structured investment vehicles) or into ABCP (Asset Backed Commercial Paper) or into money market funds. Then no wonder that eventually people panic and run - as they did yesterday – on an apparently “safe” money market fund such as Sentinel. That “toxic waste” of unpriceable and uncertain junk and zombie corpses is now emerging in the most unlikely places in the financial markets.

Reason , why I failed to convincingly explain to my wife, was that I was using two cows theory and finished with a statement that these spreadsheet-ninjas are really trying to get milk out of bunch of bulls.