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Sub-prime Crisis: Collateralized Debt Obligations
Finance & Accounting
Pages 4 (1004 words)
Sub-prime Crisis: Collateralized Debt Obligations Synopsis This research examines the structure of collateralized debt obligations. The means by which they implemented subprime mortgages classified as safe investments is considered. The failures in risk management of the major investment banks are considered…
Introduction The collateralized debt obligation (CDO) was largely attributed as being central to the sub-prime crisis. While these CDOs were recognized as central to the financial crisis, their means of operation is recognized as highly complex. During the late 1980s collateralized debt obligations had become recognized as an investment platform with returns higher than traditional bonds. CDOs most prominently emerged, however, between 2000-2006 (Clark 2011). During this period both domestic and international investors flooded money into the United States purchasing these CDOs. It was not long before the housing crisis hit and the entire American financial system nearly collapsed as a result. This essay examines the structure of the collateralized debt obligation and then evaluates the extent that the major investment banks did not use proper risk management. Collateralized Debt Obligation (CDO) CDOs are classified within the field of structured asset-backed securities (ABS). These are securities that are backed by specific assets. In the case of CDOs there were multiple assets that were grouped together (Clark 2011). These multiple assets were referred to as tranches. Just like varying securities in a mutual fund, each tranche offered differing levels of risk and return (Clark 2011). ...
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