Preface
Using even the most conservative estimates, asset-backed securities (ABSs) and collateralized debt obligations (CDOs) have grown tremendously over the past 10 years. ABS includes asset sectors in credit card debt, auto loans, student loans, subprime mortgages, home-equity loans, and equipment loans. This doesn’t even include prime mortgages, which are categorized as mortgage-backed securities (MBSs). In 2004, the U.S. ABS supply reached $ 617 billion, with subprime mortgages and home-equity loans around half (J. P. Morgan 2005). These assets can be held as “raw” or whole loans on bank balance sheets, or bonds created through securitization. A percentage of the ABS bonds themselves are repackaged into CDOs. In 2004, $ 160 billion of cash CDOs were issued (Lucas 2006) of which about $ 50 billion were ABS CDOs (Bear Stearns 2006). There are also corporate, high-yield, and emerging market CDOs. CDO issuance has grown exponentially over the past 10 years. Synthetic CDOs (built with credit default swaps rather than cash assets) issuance is growing significantly faster than “cash” CDOs (Tavakoli 2003).
The phenomenal growth of these asset classes, and primarily subprime mortgages, can certainly be attributed to the structure of interest rates in the recent past. Historically low interest rates after the Internet bubble and 9/11 led to the rational response of increased debt levels. Subprime home buyers could borrow at affordable rates and prime home buyers could borrow against ...
