Monday, 10 November 2008

More on synthetic CDOs

Many of the worst synthetic CDO deals, it seems, were either related to mortgages, or were single-tranche deals, packaged up for a particular, often novice, investor. Often, the monoline insurers were a vital part of this process, which explains much of their decline in recent months, and their downfall has produced some staggering numbers.

The US government’s credit line to AIG, which was effectively taken over the state earlier this year, now totals USD 150bn. Much of this relates to its CDS and CDO exposures, and this is partly because the monolines acted as conventional insurers in the CDS market rather than swap dealers. It said today in a somewhat apocolyptic release that “Approximately 95% of the write-downs AIG Financial Products has taken to date in its CDS portfolio were related to Multi-Sector CDOs.”

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