Monday, June 04, 2007

The CDO Mess Waiting to Happen

If you haven't heard of CDOs, you haven't been paying attention to what might be one of the great financial crisis of our times. A CDO, or a collaterized debt obligation, is essentially a collection of poor quality mortgage loans that have been packaged together by the rating agencies like Moody's and blessed with a credit rating like a bond. I have blogged before about this topic. Bloomberg had a fantastic article that deals with the issue. Here's something that stunned me:
Corporate bonds rated Baa, the lowest Moody's investment rating, had an average 2.2 percent default rate over five-year periods from 1983 to 2005, according to Moody's. From 1993 to 2005, CDOs with the same Baa grade suffered five-year default rates of 24 percent, Moody's found.

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