I have a question. Who provides the credit ratings to the CDOs? Are these provided by the rating agencies?And are they liable if the ratings provided by them are wrong, i mean if there is a default, do they accept the liability of issuing wrong ratings? And are these rating agencies paid by the bank who had created the CDOs? So what if they bribed them to issue a favorable rating and issued more and more CDOs?
Moody’s, S&P, the usual.
You’re joking, right?
That would never happen; it would be wrong.
well, i get my answer, hah, thank you sir!
one thing more, what are CDSs? and are they related to CDOs in any way?
Credit Default Swaps are like buying insurance on your investment. you (insurance buyer) pay an annual premium to the bank/instituiton (insurance seller) and in return if the issuer defaults on its obligation the seller will pay you the difference between the agreed upon price and market value of your investment after the default.
A couple of points of clarification:
- They don’t have to be on _ your _ investments: people buy CDSs without holding the underlying securities. It’s as if I were to buy a life insurance policy on Warren Buffett; when he dies, I get the payoff.
- The event that triggers the payoff doesn’t have to be a default (despite the name): it can be, for example, a credit downgrade.
These points were a significant factor in the financial crisis. All sorts of people bought CDSs (cheaply: the premia were too low) on all sorts of securities they didn’t own, then had to get payoffs when there were credit downgrades; it didn’t require defaults to start the dominoes falling.
You can buy a CDS on a CDO, but you can buy a CDS on almost any other sort of bond as well; they’re not particularly related to each other.
Rating agencies and auditors, paid to issue opinions that under no situation will they ever stand behind. My favourite.
check out a prospectus see what definition of event of default is…i also havea few contracts you can look at
wow, that sounds great! Thank you.
I would add that synthetic CDOs of which there are still a few around are made up mainly of CDS’.
There has been talk of new issuance and it makes sense because of cheap money.
clos are on fire now in europe lots of money to be made