The CDO Is Back in the Spotlight

About this time last year the term "CDO" began to make regular appearances in the news.  
The so-called "Collateralized Debt Obligations" were commonly blamed for sending an already shaky finance sector into exponential decline.  
Today "CDO" returned to the front page of the New York Times in article reporting an investigation by Congress, the Securities and Exchange Commission, and the Financial Industry Regulatory Authority into the question of whether Goldman Sachs and other investment banks that sold the CDOs engaged in dirty dealing against the clients who bought the synthetic debt packages.  The concern of the investigators is that Goldman, Deutsche Bank, Morgan Stanley and others knew that the CDO investments would sour and profited from short selling the stock of companies that bought the investments.
The investigation is still in its early stages, and those involved in it are playing zipper lips. Whether or not the investment banks broke any securities laws is still to be discovered. But in the meantime, I find the complexities of this kind of trading daunting and am fascinated to think about the minds that created the deals.  How did the financiers decide what to charge for the CDOs, how to determine their value-at-risk, and, if they did sell short against their customers, when to make the trades?  Obviously, in addition to some very finely tuned risk analysis and a great big Monte Carlo software package, a love of brinksmanship was necessary.  
This is the stuff of paper chase novels.  One former Goldman Sachs dealer has capitalized its on its sales potential with How I Caused the Credit Crunch–how much risk assessment was involved in that move!–and as it unfolds, the current Times story promises just as much page-turning fun.

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