Since when do CDOs borrow money? I’m obviously rather behind the curve here,
since I thought that a CDO was basically an unlevered entity which invested
in debt. When it got income from that debt, the income would go first to people
holding the super-senior tranches, and then waterfall down. If you want extra
risk in CDO form, that’s easy: you just buy the lower-rated tranches. There’s
no need for leverage.
Unless you’re Citigroup, it seems. Sam Jones has done
some close reading of Citi’s
10-Q:
In Citi’s 10-Q filing on Monday, the bank repeated its weekend disclosure
of $43bn in CDO super senior debt “backed primarily by subprime collateral.”
The crucial point being that most of that was made up of:
…approximately $25 billion in commercial paper principally secured
by super senior tranches of high grade ABS CDOs.
You knew that asset-backed commercial paper (ABCP) was having problems. You
knew that CDOs were having problems. What you didn’t know, until now, was that
Citi had managed to combine the two, to create CDO-backed ABCP. Yikes! (Or if
you did know, you didn’t tell me.)
Is anybody else doing this?
(Via Smith)