StudentShare solutions
Triangle menu

Sub-prime Crisis: Collateralized Debt Obligations - Essay Example

Nobody downloaded yet

Extract of sample
Sub-prime Crisis: Collateralized Debt Obligations

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). These investments differed from many mutual funds, however, in that they were constituted by fixed income assets (Clark 2011). The groupings of the securities within the collateralized debt obligations were classified according to risk, such that each CDO received a rating. The CDOs with the lowest quality securities were supposed to receive a low rating, and the CDOs with the highest quality securities were supposed to be given a high rating. As these were fixed income securities the CDOs with the highest risk had the highest coupon payments or interest rates. Contribution to the Sub-prime Mortgage Crisis Even as there was an infusion of CDO investment, there was a relative dearth of strong and stable CDO investment options. While there were many different types of CDOs one of the most prominent types that emerged during this period was CDOs composed of subprime mortgages (Clark 2011). Although many of these CDOs were composed of subprime mortgage securities, the organizations involved in producing these investment options were able to procure safe ratings by the credit agencies responsible for investigating risk (Clark 2011). Essentially, then Wall Street institutions were able to develop multi-dimensional investment options that allocated risk throughout an entire supply chain embedded deep into the American economy (Clark 2011). The extensive nature of this supply chain, rather than functioning through the interconnectedness of safety, ultimately force the government to back the risks or face the complete failure of the American financial system (Clark 2011). While there are a variety of concerns related to the government’s failure to regulate CDOs, from an overarching perspective it’s clear that in allowing risks to be spread throughout this extensive chain constituted the major failure of regulation. In further understanding the failures of risk management by the banks involved, it’s necessary to link these risks to the comprehensive chain of the collateralized debt obligations. While some researchers place the blame on external investment demands for more CDOs as ...Show more
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Sub-prime Crisis: Collateralized Debt Obligations Essay”, n.d.)
Retrieved from https://studentshare.net/finance-accounting/9185-corporate-finance
(Sub-Prime Crisis: Collateralized Debt Obligations Essay)
https://studentshare.net/finance-accounting/9185-corporate-finance.
“Sub-Prime Crisis: Collateralized Debt Obligations Essay”, n.d. https://studentshare.net/finance-accounting/9185-corporate-finance.
  • Cited: 0 times

Summary

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…
Sub-prime Crisis: Collateralized Debt Obligations
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Sub-prime Crisis: Collateralized Debt Obligations"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Debt Crisis
Ultimately, cheap credit was easily available to banks for borrowing. Details of the Crisis Shadow Banking comprises of financial institutions such as investment banks which do not come under the category of commercial banks and hence were not regulated by the US federal government.
4 pages (1000 words) Essay
Sub-Prime Mortgage Crisis
The crisis associated with sub-prime mortgage ultimately made considerable rise in the quantity of foreclosures as well as defaults (Jaffee, 2008). In this paper, the aspect of the crisis relating with sub-prime mortgage that was faced by United States and several root causes of the crisis will be discussed.
3 pages (750 words) Essay
The sub-prime mortgage crisis
The current credit crisis which is the wave of the collapse of the US sub-prime mortgage market can be evaluated by understanding the history which is associated with it in terms of the effects it has had on the borrower as well as the financial statements of the banks,other financial institutions and the investors in the mortgage backed by securities around the world
8 pages (2000 words) Essay
Risk Management and Banking Crisis
The current sub-prime crisis in the USA is a painful learning for all Banking Risk Management professionals on how stretching the strings in uncontrolled manner can result in absolute rupture. The crisis is perceived to have occurred due to inadequate Credit Risk Management when lending to Sub-Prime customers that are individuals/companies who do not have clean credit history or regular source of income.
8 pages (2000 words) Essay
Credit Derivatives Market Overview with Focus on Collateralized Debt Obligations
This essay focuses on Collateralized Debt Obligations and take up for discussion characteristics, risks and issues associated with Collateralized Debt Obligation. It concludes the paper with uses and implementation methods utilized under CDOs. Credit derivatives are instruments essentially leading to transference of credit risk.
17 pages (4250 words) Essay
The sub‐prime crisis
However not only the lending sector is the main effected sector of the market but also due to credit crunch, other sectors especially services and manufacturing sectors seem to be the target also. The short run scenario does not seem to be promising as the crises
14 pages (3500 words) Essay
Following the sub-prime crisis and the impact of 'Toxic' debt is there a future for the securitization of commercial property
The Wall Street brokers and investors lost around $175 billion of capital within the July 2007 to March 2008 (Blackburn). This crisis occurred when
12 pages (3000 words) Essay
Sub-Prime Mortgage Crisis
In this paper, the aspect of the crisis relating with sub-prime mortgage that was faced by United States and several root causes of the
3 pages (750 words) Essay
Collateral mortgage obligations
Therefore, there is insignificant of relationships in RQ 1 through RQ 3; hence, the same could not provide the basis of determining a standard pricing model for valuing
65 pages (16250 words) Essay
Collateralized Loan Obligations
Trading of bonds supported by riskier corporate loans of the United States have heaved to their maximum level in 7 years, thereby assisting to increase a lending boom which is concerning the
7 pages (1750 words) Essay
Comments (0)
Click to create a comment
Let us find you another Essay on topic Sub-prime Crisis: Collateralized Debt Obligations for FREE!
Contact us:
+16312120006
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us