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JT Note: I later discovered the sketch was excerpted from Credit Magazine's "discredit," April 1, 2004. The Fourth Dimension (Hoaxy CDO4 Product) WSJ - November 19, 2005 By Gene Colter Credit-derivatives-market eggheads are renowned for dreaming up incredibly opaque investment products, but it seems some of them also have a humor streak. Making the email rounds of various credit trading desks in London and New York is a spoof of a new kind of collateralized debt obligation, called the CDO4. The product claims to use a four-dimensional risk matrix, thereby creating the most complex product known to man. The fictional CEO boasting about the CDO4 says: "While I cannot even begin to understand the nature of our structured credit team's achievement, rest assured they will be awarded gargantuan bonuses." The emailed note includes a complex schematic of the product that includes references to money parked offshore, "something to confuse you," "blah blah blah" and "kiss your money goodbye." The hoaxy CDO4 plays off a product called CDO-squared, which is essentially the repackaging of CDOs into a new, more complex CDO. Janet Tavakoli, president of Tavakoli Structured Finance Inc. of Chicago, says CDO-squared products have fallen out of favor because they turned out to be a lot riskier than expected. But credit-derivatives mavens keep trying to show off their math skills: products that do a third repackaging of CDOs are known as "Ice Cubes." Ms. Tavakoli says these products have a lot of "cliff" risk (as in, falling off one) and show that some credit wizards may have too much time on their hands. END OF EXCERPT Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008). Janet Tavakoli's book on the global financial
meltdown is Dear Mr. Buffett: What An Investor Learns 1,269
Miles From Wall Street (Wiley 2009). TSF makes some information available to the general public. Please
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Janet Tavakoli, President:
jt@tavakolistructuredfinance.com
TEL: (312) 540-0243 |