Russian doll that could turn toxic for Diamond
Friday 22 October 2004
Latest in Business News
On Facebook
They were once memorably referred to as the "toxic waste" of the capital markets by Sir Howard Davies, the former chairman of the Financial Services Authority. However you choose to describe them, collateral debt obligations, or CDOs as they are known, are certainly complex beasts.
They were once memorably referred to as the "toxic waste" of the capital markets by Sir Howard Davies, the former chairman of the Financial Services Authority. However you choose to describe them, collateral debt obligations, or CDOs as they are known, are certainly complex beasts.
CDOs belong to the family of financial instruments known as credit derivatives. These are essentially contracts under which one party insures another against default by a debtor. At the most esoteric end of the spectrum exist CDOs - portfolios of credit risk which are packaged together and then sold to investors through the issue of notes secured against the bonds and loans from which the portfolio is constructed.
They are marketed in tranches - the higher the risk of default, the greater the return. Some CDOs contain investments in other CDOs - which is why they are sometimes known in the industry as "Russian dolls". To complicate things, some CDOs are "actively managed" - which means that the asset manager can move different credit risks in and out of the portfolio.
Barclays Capital marketed 16 CDOs. In the case of the two sold to HSH Nordbank, one of them had investments in seven other CDOs and the other had exposure to 15 other CDOs. Ordinarily, the purpose of investing in a CDO is to obtain higher returns while spreading the risk. However, the more cross-shareholdings that exist between CDOs, the more the risk is concentrated. No wonder they are a grey area as far as regulation is concerned and why the FSA advises only sophisticated investors to get involved.
- 1 No secularism please, we're British
- 2 Apple admits it has a human rights problem
- 3 'Drunk tanks' and minimum prices to help Britain sober up
- 4 Working as a jail torturer ruined my life
- 5 Lightning kills an entire football team
- 6 Reinstate Knox's murder charge, Italian court told
- 7 Caught in his own blast: an Iranian targeting Israel
- 1 Spotify: 1 million plays, £108 return
- 2 How Koscielny became prince of the Emirates
- 3 Apple admits it has a human rights problem
- 4 Mark Steel: If religion is 'marginal', I'm the Pope
- 5 No secularism please, we're British
- 6 Lightning kills an entire football team
- 7 Matthew Norman: There's always the Human Rights Act, Trevor
- 8 Special report: The hungry generation
- 9 I was born to be a killer. Every night I see the Devil in my dreams
- 10 Six Grammys, five years off: Adele puts love before career
Free trial of new Independent iPad app
Get your daily dose of the best of British journalism, sponsored by American Airlines
Win a three-week coastal jaunt
Spend three weeks exploring every nook and cranny of gorgeous Atlantic Canada.
Amazing restaurant offers
Three glasses of free champagne and a special menu at 46 top London restaurants.
Latest Independent competitions
Win anything from gadgets to five-star holidays on our competitions and offers page.
Commercial thought leaders
Watch the best in the business world give their insights into the world of business.
Career Services
Day In a Page
No secularism please, we're British




Comments