Collateralized Debt Obligations and Structured Finance- New Developments in Cash and Synthetic Secur Description:

Collateralized Debt Obligations and Structured Finance: New Developments in Cash and Synthetic Securitization review:
5 stars (Straight Steering in Structured Finance) - Even the experts have trouble understanding the various complex structures in the collateralized debt obligation market. In this book, Tavakoli does for CDOs what she did for Credit Derivatives. She makes sense of the confusing terminology, shines a bright light on the key issues, and discusses how to avoid the potential for fraud.



She clarifies what the rating agencies miss. For instance, in a dispute between a German bank and a British bank that was recently settled in London, the British bank was alleged to have misled the buyer and then taken advantage of the buyer by substituting fallen angels into the CDO portfolio. Rating agencies don't capture this type of risk. Tavakoli explains how ratings won't save investors, but paying careful attention to the portfolio trading constraints in the deal documentation will. She recommends rewriting any "standard" document that doesn't adequately protect an investor's interest by adding trading rules and restrictions (if it is allowed at all), reserve accounts, and other structural protections.



She also debunks the term CDO "arbitrage." This "arbitrage" is not risk-free for the investment banks who arrange these deals, but using this term gives comfort to bank managers who may be unaware of the hidden volatility in their trading portfolios. Very inconvenient when one can't transfer the risk to an unwary investor's portfolio. Tavakoli points out that single tranche CDOs in which one is long the super senior and equity and short the mezzanine tranche can turn the trading book into a delta hedging parking lot. She also points out that CDOs squared put you at risk for having some of the least advantageous structures stuffed as collateral into a portfolio. If it requires diligence and rewriting the documents to get a fair deal in a CDO, why would you accept tranches from deals that you didn't have a chance to rework? Put in this context, buyers of those types of deals should demand a huge premium. These deals are beyond the scope of meaningful ratings, and nearly impossible to properly model in the secondary market.



The language is precise, and as she points out it can even be more important than understanding the numbers, since overwhelming risk can come from inadequate documentation. If you are an investor, don't venture into the world of collateralized debt obligations without reading this book. If you are trading these tranches, this book will give you details about these products you won't find anywhere else.


2 stars (Where was the editor?) - As a novice to securitizations, I can't speak about the merits of this book in comparison to its peers. However, I will say that it is neither a reference book nor a novel. The overall structure and organization of the book was horrendous with stories leading nowhere and technical examples blurted out onto the page without thought to a fundamental theme or why they were offered. An example is not a good teaching lesson if it doesn't relate to a fundamental point.



I don't blame the author because she is obviously skilled and well informed. I do blame the editor for not reviewing the book more carefully. Wiley shame on you!
5 stars (Excellent Resource for Investors) - For investors who need to know more about structured finance including new synthetic securitizations using credit derivatives technology, this book is a great resource.