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Thursday, May 28, 2020

Explained snippets | This Word Means — Collateralised Debt Obligation

What are these financial products, whose poor performance contributed to the global financial crisis?

By: Express News Service | New Delhi | Updated: September 19, 2018 5:28:29 am
Pooled loans were the key source of global financial collapse. Pooled loans were the key source of global financial collapse.

A CDO, short for Collateralised Debt Obligation, is a financial product that came into focus during the financial meltdown a decade ago, when it performed badly and caused huge losses to financial institutions. A CDO is a structured financial product that pools together cash flow-generating assets and repackages these assets into tranches that can then be sold to investors. The pooled assets could include mortgages, bonds and loans that are primarily debt obligations that serve as collateral for the CDO. In a CDO, the tranches vary substantially on the basis of their risk profiles. The senior tranches are typically considered safer because they have first priority on payback from the collateral in the event of default. So, these have a higher credit rating and offer lower coupon rates, while the junior tranches offer higher coupon rates to compensate for their higher default risk.

The earliest CDOs were constructed by Drexel Burnham Lambert, the home of former junk bond king Michael Milken, in 1987 by assembling portfolios of junk bonds issued by various companies. These instruments exploded in popularity after 2004, with CDO sales rising from $30 billion in 2003 to $225 billion in 2006. But a subsequent implosion, triggered by the bursting of the US housing bubble, saw CDOs become one of the worst-performing instruments during the market meltdown of 2007-09. This resulted in losses running into hundreds of billions of dollars for some of the biggest financial institutions. Some of these went bankrupt while others had to be bailed out. CDOs played a big role in contributing to the escalation of the global financial crisis during the peak of the crisis.


Commitment to policies for people of poorer countries: US ranked low

A ranking of 27 of the richest countries has placed the United States near the bottom — at rank 23 — in terms of the “Commitment to Development Index” (CDI), implying that the US is among the least committed to policies that benefit people living in the poorer nations. The annual CDI report is released by Center for Global Development, a Washington-based non-profit think-tank.

Source: Centrefor Global Development

The latest report, released Tuesday, shows that the poor performance by the US was driven by low scores on foreign aid, finance, and environmental policies. The report ranks the 27 richer countries on these three aspects and four others, then ranks them on overall performance. Sweden tops the list, followed by Denmark and Finland. At the bottom, below the US, are Japan, Poland, Greece and South Korea.


Tip for Reading List: Sleep loss & car crashes, quantified

The dangers of driving while drowsy are already well known. Now, for the first time, a peer-reviewed study has quantified the relationship between how much a driver has slept and his or her risk of being responsible for a crash. Conducted on an American database, the study estimates that 7% of all motor vehicle crashes in the United States, and 16% of fatal crashes, involve driver drowsiness. Researchers from the AAA Foundation for Traffic Safety, a non-profit organisation, analysed data from a previous study by the US Department of Transportation, which involved 5,470 crashes. They found that drivers who reported fewer than 4 hours of sleep had 15.1 times the odds of responsibility for car crashes, compared with drivers who had slept for 7-9 hours in the preceding 24-hour period. The study, published in the journal SLEEP, has been posted online at —Source: Eurekalert

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