CDO and Subprime

Collateralised Debt Obligation (CDO) and the subprime crisis have been the most talk-about topics in the past year. I am reading some materials on CDOs today. From the face of it, I don't think CDOs are bad. If I were offered such structured securities, most probably I will grap them.

Those mortgage-backed CDOs give investors a fixed income based on the money generated from mortgage loans. Houses, which are brick & mortar, serve as collaterals. What can be better than such an investment? If the mortgage lenders stick to the established credit rules in the past, this investment will remain as AAA investment grade investment.

CDOs turn sour only when the subprime factor comes in. That is when some become greedy. On the one hand, they inflate the true value of the houses that serve as collaterals; on the other, they asked people who were not previously qualified for mortgage loans to take up loans, which is the source of all evils of the current subprime crisis.

I suspect I had indirectly fallen prey to the subprime crisis. A fixed-income fund that I have had dropped quite a lot in the past few months. The fund is managed by a bank in Singapore, which has the largest CDO exposure.

Let me pray...