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June 7, 2013

Markets Insight: ‘Frankenstein’ CDOs twitch back to life

“Has Frankenstein returned? That is a question some investors might ask when they look at the world of collateralised debt obligations.

After all, a mere three years ago it seemed as if the really monstrous forms of CDOs that proliferated during the credit bubble had been killed off. Most notably, issuance of so-called synthetic CDOs – or bundles of derivatives based on corporate, mortgage and sovereign debt – collapsed from a peak of $648bn in 2007 to $98bn in 2009.

But now those CDOs are apparently twitching again. As my colleague Stephen Foley has reported, issuance of collateralised loan obligations – or bundles of corporate bonds and loans – has surged this year to $37bn. And a report from the Wall Street Journal suggests that some investment banks are now considering issuing synthetic CDOs too, or pools of corporate derivatives.

So should this development be triggering screams from policy makers?”


Read the full Financial Times article here

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