Comments on Selected Structured Finance Products
MULTISECTOR CDOs: CDOsN
Multisector CDOs are also known as ABS CDOs, ABS of ABS, CDOs squared (or CDOs2), or CDOs cubed (CDOs3). These products appeared in 1999 in response to investors’ desire to securitize their own positions of structured product. Both balance-sheet and off-balance-sheet arbitrage deals have been done.
The spectrum of collateral for this product is more varied than for other CDOs. By that I mean that some multisector CDOs have been structured backed by AAA-rated tranches of other CDOs, and some have been structured using BBB-rated tranches of other CDOs. All types of CDO and non-CDO collateral have been added to the multisector collateral mix, including nonperforming loans, mezzanine tranches of other CDOs, and the result is an indigestible collateral stew.
Since it is possible to do a synthetic deal with highly rated collateral, as we saw earlier, banks and insurance companies that need regulatory capital relief are happy to provide collateral for these CDOs, at least under the current regulatory capital regime.
Motives may change in the future. As more investors become aware of the structural risks of older deals on their balance sheets, they may seek to reduce the risk of poorly structured mezzanine tranches. For example, BBB tranches that are at risk of moral hazard trading of the underlying asset portfolio are likely securitization candidates. Two large UK banks recently completed synthetic ...