A CDO = Collateralized Debt Obligation.. its not cash its a debt obligation. CDO’s backed by mortgage obligations are backed at the end of the day by real estate.. real estate that is not remotely worth in general what was loaned for it.... The people buying the CDO’s weren’t interested in the real estate, all they wanted was the payments.. well guess what? Those payments aren’t coming and the “collateral” backing those debt isn’t remotely worth what the payment promises they bought into said they were.
A CDO is nothing more than an IOU... yes its backed by collateral, but most of that collateral isn’t worth the debt, is tought to take over, costly, and very slow if at all possible to turn back into cash and most the buyers of CDO’s had no idea what was really backing that debt obligation... in fact by that’s why this thing is so pervasive, people can’t even tell what their exposure is....
A bundle of sub prime loans is sold to entity A, entity A, borrows some more money using their CDO as collateral then sells this new debt as a CDO up the chain etc etc etc....
It was a giant ponzi scheme, and its huge.
Having a note from someone who’s never successfully paid off a debt in their life, at 14% interest gets bundled up and sold as part of a CDO to someone who just sees the bundle has a 12 or 14% overall return.... of course the default rate of that bunch is probably going to wind up being 30% or more inside of 5 years... assuming housing prices remain stable... if they fall (as they are doing) it’ll hit much higher rates.
A CDO at the end of the day is the purchase of a debt obligation.... leveraging it to take on more debt is foolishness... but that’s what happened, those loans were then packaged and sold to others, who used them as collateral for other loans... etc etc etc.. and you wind up where we are now, with a huge bubble, where you have more than 20-30 in debt for every 1 dollar in real assets.
There is no such thing as DEBT without RISK, but since the CDO computer modeling and the automated fico scores etc said risk is low, to nill... it just kept going. Of course its not nill, as we are seeing, its actually quite high... and POP goes the weasel.
Toddsterpatriot,
You have seriously disappointed me this morning. I was positive that you would have a retort to HamiltonJay’s Post #426. Where’s your smartass mouthfull demanding that he explain something else.
Where did you disappear to? Come on, crawl out from the corner and make some kind of smart remark. I know you’re capable of it.
Yes, that's correct.
CDO’s backed by mortgage obligations are backed at the end of the day by real estate..
You bet.
real estate that is not remotely worth in general what was loaned for it....
Depends on the CDO.
The people buying the CDO’s weren’t interested in the real estate, all they wanted was the payments..
Correct. If they wanted real estate instead of a stream of payments, they'd have bought real estate.
well guess what? Those payments aren’t coming and the “collateral” backing those debt isn’t remotely worth what the payment promises they bought into said they were.
Depends on the CDO.
A CDO at the end of the day is the purchase of a debt obligation
You bet. Just like your individual mortgage is a debt obligation.
Let me know when you figure out that a derivative is different than a debt. Why not use the example of an option from the CBOE? Explain how that's debt. Take your time.