Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Thu, 16 May 2013

The CDO'ization of everything

Six years ago, when the global financial crisis began, Collateralized Debt Obligations (CDOs) were regarded as the villains that were the source of all problems. Today, the clock has turned full circle, and CDO like structures have become the solution to all problems.

The biggest innovation in the CDO was actually a contractual bankruptcy process that is lightning fast and extremely low cost (see my blog posts on the Gorton-Metrick and Squire papers that argue this in detail). The world is gradually coming around to realizing that normal bankruptcy does not work for the financial sector and the contractual CDO alternative is far better. In 2006, I wrote that the invention of CDOs has made banks and other legacy financial institutions unnecessary. The crisis seems to be turning that speculation into reality.

Posted at 11:53 on Thu, 16 May 2013     View/Post Comments (1)     permanent link