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Good piece by Steven Pearlstein from last December that's helping me understand Collateral Debt Obligations better. ("Better" here is a relative term, however. Still wouldn't say that I understand them.)
It's Not 1929, But It's The Biggest Mess Since
Now, to truly understand I would have to know what was going on in this paragraph (Pearlstein has already explained what "mezzanine" and "tranching" mean, but I don't understand how "using the same tranching process" changes mezzanine-rated assets into AAA).
It is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired.
It's Not 1929, But It's The Biggest Mess Since
Now, to truly understand I would have to know what was going on in this paragraph (Pearlstein has already explained what "mezzanine" and "tranching" mean, but I don't understand how "using the same tranching process" changes mezzanine-rated assets into AAA).
It is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired.
