Collateralized debt obligations (CDOs) became so toxic that by August 2007 Ian Kerr dubbed them “Chernobyl death obligations” (after the 1986 Chernobyl nuclear reactor disaster). The CDO nickname “Chernobyl death obligation” has been used by Satyajit Das, Nouriel Roubini and other financial writers.
Wikipedis: Collateralized debt obligation
Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) with multiple tranches that are issued by special purpose entities and collaterized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand. CDOs’ value and payments are derived from a portfolio of fixed-income underlying assets. CDOs securities are split into different risk classes, or tranches, whereby “senior” tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.
In simple terms, think of a CDO as a promise to pay cash flows to investors in a prescribed sequence, based on how much cash flow the CDO collects from the pool of bonds or other assets it owns. If cash collected by the CDO is insufficient to pay all of its investors, those in the lower layers (tranches) suffer losses first.
CDO can be created as long as global investors are willing to provide the money to purchase the pool of bonds the CDO owns. CDO volume grew significantly between 2000–2006, then declined dramatically in the wake of the subprime mortgage crisis, which began in 2007. Many of the assets held by these CDOs had been subprime mortgage-backed bonds. Global investors began to stop funding CDOs in 2007, contributing to the collapse of certain structured investments held by major investment banks and the bankruptcy of several subprime lenders.
8 September 2007
Credit Crunch – The New Diet Snack for Financial Markets
September 5, 2007
Satyajit Das works in the area of financial derivatives and risk management.
By August 2007, credit markets had just about ceased to function. A veteran commentator – Ian Kerr - compared the current credit crunch to death from radiation – CDOs, particularly those with sub-prime exposure, now stood for Chernobyl Death Obligations!
Monday September 17, 2007
The new money game comes close to the edge
By Satyajit Das
The current market volatility is not a correction in prices but this gigantic liquidity bubble unwinding. It is not going to be quick or painless. A veteran commentator – Ian Kerr - compared the current credit crunch to death from radiation – CDOs; particularly those with sub-prime exposure now stand for Chernobyl Death Obligations.
Mortgage Servicing Fraud Forum
10/18/07 at 10:09 PM
The Super Conduit Proposal
Minyanville Staff Oct 17, 2007
This article is being brought to you by Minyan Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
Collateralized debt obligations (CDOs) – a souped-up securitization which one veteran commentator Ian Kerr has christened Chernobyl Death Obligations – have been one of the primary lines of transmission of risk and losses in the current credit problems.
Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
By Kevin Phillips
New York, NY: Penguin Books
Small wonder that no Environmental Protection Agency existed to deal with the financial equivalent of toxic waste (CDOs nicknamed “Chernobyl Death Obligations ”).
A crash course in the future of finance
By Nouriel Roubini and Stephen Mihm
New York, NY: Penguin Press
For that reason, securities like CDOs—which now go by the nickname of Chernobyl Death Obligations—must be heavily regulated if not banned.
New York City • Banking/Finance/Insurance • (2) Comments • Saturday, June 18, 2011 • Permalink
Very good to know about “Chernobyl death obligation”! I think Satyajit Das perfectly used it for his writing. Thanks a lot.
Chernobyl Death Obligation is really difficult to manage especially in adverse situations. one should always select some easy and effective option in such situation for self help.