Cutting edge intro: CDOs and the risk of risk aversion
The failure, and the allure, of collateralised debt obligations (CDOs) is often pinned on the way they were rated and priced, which underestimated risk. However, new analysis shows the products to be more robust than is generally thought. Nazneen Sherif introduces this month’s technical articles
Collateralised debt obligations (CDOs) were once regarded as one of the brightest innovations in finance, giving issuers a way to buy protection on the underlying assets and offering investors a higher return than was available on other, similarly rated products. The party stopped abruptly in mid-2007, as ratings collapsed, defaults rose and liquidity vanished. Fingers immediately pointed at rating agencies and the quants who priced CDOs.
A lot of the blame centred on how banks and rating
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