Friday, December 21, 2007

Wonky pet toys don't always bowl strikes after all, maybe

Guambat, with the help of Felix Salmon, took a moment's interest in trying to follow the loose thread hanging off the jumper of CPDOs. It was never to be. Guambat just couldn't fathom such a "sure thing". So he found better or worse things to do, like scratching that infernal itch behind his ears.

Now, Guambat is just as glad to have lost interest, if not principal, nor principle.

It seems that CPDOs don't forever bowl strikes, after all. The statistics on the number of gutter balls is yet to be compiled.

Gwen Robinson, in FT Alphaville, writes:
The volatility in credit markets appears set to claim fresh victims after Moody’s on Thursday put a number of complex and highly leveraged products, known as CPDOs, on review for downgrade.

The move affects seven deals from the bank that invented the product, ABN Amro, as well as deals from Lehman Brothers, Dresdner Kleinwort, BNP Paribas and Merrill Lynch.

The bets made through CPDOs (constant proportion debt obligations) on large portfolios of highly-rated corporate debt exposures are leveraged by 15 times on average, which means the CPDOs’ value can be highly volatile.

Moody’s said all the transactions involved had lost about 30% of their value since launch in 2006 or this year.
Maybe that's what 3CPO was going on about and R2D2 went into blue screen of death trying to explain.

To be fair to Felix Salmon, and why not, he's a regular read, the only thing that has happened so far is that the CPDOs in question are only up for review for downgrade. It's not like they've actually defaulted yet. We still don't know if "
they're largely immune to corporate defaults". But we're in a pretty good environment to test the hypothesis.

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