Monday, 3 November 2008

"What’s the best investment? It’s called a collateralized debt obligation,"

As previously noted here, the New York Times can do financial stories better than any other media outlet (not that this should stop anyone from trying!). I particularly like it when it attempts 'cradle to grave' pieces that focuses initially on an individual, then looks at how they are enmeshed in the bigger financial world.

Here's one, a rather scary one, about a schools administrator, an Irish-German bank and a rather sharp financial advisor, a Mr Noack, who sold a USD 35m CDO investment on the back of two hours training.

"But Mr. Noack’s explanation of a CDO was very wrong. Mr. Noack, who through his lawyer declined to comment, had attended only a two-hour training session on CDOs, he told a friend.

The schools’ $200 million was actually used as collateral for a complicated form of insurance guaranteeing about $20 billion of corporate bonds. That investment — known as a synthetic CDO — committed the boards to paying off other bondholders if corporations failed to honor their debts.

If just 6 percent of the bonds insured went bad, the Wisconsin educators could lose all their money. If none of the bonds defaulted, the schools would receive about $1.8 million a year after paying off their own debt. By comparison, the CDOs offered only a modestly better return than a $35 million investment in ultra-safe Treasury bonds, which would have paid about $1.5 million a year, with virtually no risk."

More of this kind of thing, please!

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