Collateralized debt obligations, CDOs (also usually referred to in German; less frequently also

asset-backed bonds): A special business of the securitization market. Banks – pool hundreds or even thousands of loans – as a basket of individual risks and – contribute them to a special purpose entity. – The latter splits the portfolios into several tranches and – sells them to investors as CDO securities (a structured finance product that typically securitizes a diversified pool of debt assets; these assets, corporate loans for instance, are split into different classes of bonds. Investors in CDO senior and mezzanine bonds can earn high returns relative to similarly rated asset-backed securities). – The individual tranches carry different interest rates, depending on the level of risk involved. The cash flow of each of these securities is linked to the performance of the respective debt instruments. – CDOs were devised and introduced in 1987 by the investment bank Drexel Burnham Lambert in New York – now defunct. – See contagion effects, asset-backed securities, CLO funds, equity kikker, first-loss default clause, first-loss tranche, toxic securities, credit risk transfer, collateral crisis, mezzanine tranche, originate-to-distribute strategy, portfolio insurance, residential mortgage-backed securities, ninja loans, single master liquidity conduit, subprime crisis, subprime lending, securitization structure, true sale securitization, interest rate freeze, special purpose vehicle. – Cf. BaFin Annual Report 2003, p. 21 f., BaFin’s 2004 Annual Report, p. 30 f. as well as the respective BaFin Annual Report, Deutsche Bundesbank Monthly Report of March 2006, p. 40 (overview), ECB Monthly Report of February 2008, p. 92 ff. (explanation of CDOs; classification; overview), BaFin Annual Report 2009, p. 155 (about a quarter of German banks’ securitization positions at year-end 2009 were CDOs, half of which were securitized corporate financing [collateralized loan obligations]).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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