A Rose by any other name?
 

In 1987, the Collateralised Debt Obligation (CDO) was born. It was the creation of Drexel Burnham Lambert, the former home of the junk bond king, Michael Milken. Initially, CDOs contained portfolios of junk bonds. The theory was that although some of the junk bonds would go toxic, as long as the bulk didn't, the CDO would hold its value. Laughingly, CDOs were considered a safe investment even though that which they contained was potentially very toxic. The reality was that because each CDO contained thousands upon thousands of bonds, it was difficult to assess the true value of any CDO. Even if the true value were to be assessed accurately, it would take a considerable amount of time, effort and therefore cost. Rating agencies such as S & P, Moody's and Fitch were paid to assess CDO values. It is said non of these companies ever rated a CDO below 'AAA' because, if one rating agency didn't rate a CDO 'AAA', another one would.

In the early days, CDOs were low key, niche products. Then, other forms of debt began to be included in CDOs such as student loans, car loans, credit card debt and even aircraft leases.

That all changed in 2003 with the US housing boom. Lenders had an excess of funds and so lent to sub-prime borrowers using teaser rates which, down the line, would be increased by up to 200%. Such mortgages were toxic unless the borrower was able to secure a new teaser rate when the old one expired. Because of the potential toxicity of the mortgages, they were wrapped up, by the thousand, into CDOs and sold. Although the potential toxicity of the CDOs was high, they were 'AAA' rated by the rating agencies.

Within a short space of time, CDOs were big business. By 2006, $225 billion were in circulation. Even synthetic and cross CDOs were created.

When teaser rates were no longer available, mortgage defaults began to increase. In 2007, the default rate accelerated.

In 2008, the charade was exposed and financial giants such as Bear Stearns and Lehman Bros. failed.

In 2015, a new? financial instrument was born - the Bespoke Tranche Opportunity or BTO for short. For all intents and purposes, it's a CDO by another name. This is yet another attempt, by Wall St., to pull the proverbial wool over the eyes of the greedy and stupid using different bull shit terms which attempt to mystify what is, essentially, a simple, bull shit and highly toxic product. The market is beginning to bite due to the inherent low-yields of the current set of financial instruments.

God help us all. A sad, sad attempt at sick irony.