Collateralized Debt Obligation
(CDO) Research
Collateralized Debt Obligations (CDO) are in Bailout The Game
We used CDO's in our board game as our big debtors on the Frantic Mae Frivolous Mac cards. These cards are used by the Fed to engage TARP funding. Paulson encouraged Bush to push the congress for the release of the TARP funds which was quickly renamed the bailout. The funds from TARP were used by the banking industry to help support the defaulted loans packaged within the Collateralized Debt Obligations.
What Are Collateralized Debt Obligations (CDO's)?
A collateralized debt obligation is a flexible construct that uses assets
to create value for sale to the open market of financiers, investors
and the banking industry. Therefore, the CDO is a type of Asset-backed security.
In its most simple form, the creation of a CDO is handled by a corporate entity
that organizes the CDO to hold assets as collateral while selling packages of cash flow
to investors. The construction of the CDO is as follows:
- A special purpose entity (SPE) accumulates a portfolio of underlying assets. Typically, underlying assets which are commonly held include mortgage-backed securities, commercial real estate bonds and/or corporate loans.
- Then the SPE will issue bonds or CDO's each with a different organization to their investors and the proceeds from the investments are used in the purchase of the portfolio of underlying assets. In order to mature the investment more rapidly and allow for the collateralized debt obligation to become valuable, the senior CDO's are paid from the cash flows from the underlying assets before the junior securities and equity securities.
