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Contrarian Investing: CDOs are back, baby

Posted May 15, 2008

“With 80% of losses from the subprime crisis already reported, according to a Fitch Ratings Inc. report released Wednesday, the collateralized debt obligation (CDO) market that many had written off for dead could be showing new signs of life.” — Jennifer Yousfi

by Jennifer Yousfi

Baltimore – (TFN): With 80% of losses from the subprime crisis already reported, according to a Fitch Ratings Inc. report released Wednesday, the collateralized debt obligation (CDO) market that many had written off for dead could be showing new signs of life.

Many have laid the blame for the current credit crunch squarely at the feet of poorly managed CDOs funded by mortgage-backed securities (MBS). When the true risk of such assets became apparent as the U.S. housing market crumbled, the CDOs quickly lost value.

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As a result, the banks that sponsored the CDOs - which were often held by an independent special purpose vehicle - were forced to take over $323 billion in writedowns so far and shed an estimated 65,000 jobs in the financial industry.

Fitch estimates that the subprime losses to date are evenly split between Europe and the United States, with $77 billion of losses for each, Reuters reported. Asia has seen an additional $10 billion in losses. And the bulk of those losses stemmed from MBS-backed CDOs. So why would anyone want to invest in CDOs?

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