Thursday, July 10, 2008

The Reincarnation of the CDO


Sales of collateralized debt obligations (CDOs) composed of asset-backed securities fell to less than $1 billion this year from $227 billion in 2007 because of the global credit crunch. But just when you thought CDOs were going to be shunned by investors for a long time, investment banks are repackaging, renaming and reselling them to their institutional clients.

An article that appeared in Bloomberg this week, Toxic CDOs Given Up for Dead Coming to Life With Pension Funds, describes how investment banks are finding buyers under a different name: Re-Remics, which stands for "resecuritizations of real estate mortgage investment conduits,'' the formal name of mortgage bonds. The article is mostly favorable citing the need to introduce liquidity in a market that desperately needs it. I quote the following:

"It's just the reincarnation of the CDO,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. "The mechanics are the same, but you're getting in at a much different level of valuation.''

GE Asset Management has considered buying the debt, Colonna said. The General Electric Co. unit may also have Re-Remics made out of bonds it owns if disposing of the riskier pieces boosts the securities' overall value.

..."The hope is that by moving illiquid bonds to interested parties, the structured-finance community can look to restart,'' he said.

More than $9.3 billion of Re-Remics were created in the first five months of 2008, almost triple a year ago, according to Inside MBS & ABS. The debt represented 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

The fate of Re-Remics remains to be seen, however, buyers beware: if the credit crisis worsens, investors might consider dubbing them 'Re-Gimmicks'.

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