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Strategies & Market Trends : John Pitera's Market Laboratory
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To: John Pitera who wrote (10073)9/25/2008 10:23:45 AM
From: Hawkmoon1 Recommendation  Read Replies (1) of 33421
 
John,

Found an excellent article describing CDOs/CLOs and how the CDS markets (and indices) intertwine:

moneymorning.com

Btw... loved this little tidbit:

There’s a problem – an inherently systemic problem – and it has to do with how structured investments like tranched collateralized debt obligations (CDOs), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and credit default swaps on them and on corporate debts and loans are actually valued.

Individually, CDOs are hard to value. Suffice it to say, legend has it that constructing the cash flow payments on the first theoretical 3-tranche CDO (the simplest type of CDO) took a Cray Inc. (CRAY) supercomputer 48 hours. Now try and value credit default swaps on them!

But even more frightening was his following statement:

Credit default swaps are creating a downward spiral in the capital markets, driving up the cost of capital, and squeezing out all manner of borrowers. And these speculative bets run amok are undermining all U.S. Federal Reserve and U.S. Treasury Department efforts to “liquefy” the system. If this keeps up, the credit default market could sink the U.S. economy into a recession/depression that will make the Great Depression look like a day at the beach.

Hawk
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