Dicey Deals Done Dirt Cheap (Excerpt)
Monolines in Dire Subprime Straits
By Janet Tavakoli, president of Tavakoli Structured Finance, Inc.
January 3, 2008

[U]nderwriting quality for several of the financial guarantors was not high and was actually naïve. Rigorous statistical sampling of the underlying portfolios was not performed, and they overly relied on faulty models...

I recently reviewed a publicly available prospectus from a deal brought in the last quarter of 2006. It was a subprime mezzanine deal, a “CDO-squared,” among the worst performing of all CDOs. The underlying portfolio includes tranches of CDOs with the lowest available investment grade rating of BBB when the tranches were initially brought to market. The interest cash flows are diverted to the benefit of lower class tranches. If the deal hits an unwind trigger enabling the financial guarantor to liquidate the portfolio, the prospectus language is ambiguous enough that the financial guarantor may have to fight with other investors for cash flows. Furthermore, it is virtually guaranteed that the illiquid overrated tranches used as collateral will fetch poor market prices.

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