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Non-Tech : Derivatives: Darth Vader's Revenge
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To: Henry Volquardsen who wrote (210)9/27/1998 4:37:00 AM
From: Larry Weiner  Read Replies (1) of 2794
 
If you really want to get technical, a CMO is a group of bonds structured from whole loan mortgages, mortgage pass-through securities, or other CMO tranches. The CMO bonds commonly thought of as "derivatives" are inverse floaters, inverse IO's, PO's, support bonds, etc. These were the types of bonds that blew up in 1994 and took down Askin and a host of others. My read of the LTCM situation (from the NYTimes and WSJ) is that these types of bonds were not part of the Fund's strategy. It sounds like they were doing simple mortgage-treasury spread trades. Betting on a tightening mortgage-treasury spread has been a losing trade this year, and they must have been doing it in enormous size, so they were killed by the leverage.
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