CDOs, PSEUDO DIVERSIFICATION and HOTDOGS

CDOs or Collateralized Debt Obligations were marketed as financially engineered diversified portfolios offering relatively high projected rates of return for a yield hungry buyers. These portfolios consisted of various slices or tranches of paper of multiple deals. This paper represented one party’s assets and another party’s liabilities. For example, mortgage notes, credit card receivables, subprime mortgages whether senior or junior are some key ingredients.

Diversification principles indicate that by combining non-correlated assets one construct a less risky portfolio. Essentially, diversification acts to neutralize non-systemic or individual risks. There are offsets. Complementarily, appropriate hedging can treat systemic or market risks.

What occurred is more in the order of “filling” portfolios with undesirable waste products. Under the guise of diversification, various engineers spiced the returns of the packaged product or portfolio to make them more palatable by listing projected or assumed rates of return that could offer relatively high yields for the toxic pieces. However, for this to be valid pretty much everything would have to work out precisely according to assumptions that may not be reasonable to begin and continue with. Filling portfolios with “empty” or highly questionable investment paper is not diversification.

This relates to the proverbial hotdog question as to “What’s in it?” Whereby the processor/vendor replies “Don’t ask!”. ASK…

To order a copy about the original HOMER™ securitization, visit a book site or section such as:


For consulting or licensing information:


OASIS® online contains many references for Derivatives. The following list highlights some of these references.


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