CDOs based on asset-backed securities headed for oblivion, report predicts
ABS CDO issuance has virtually disappeared; ‘no ready buyers’
By Nicholas Rummell
May 21, 2008
It’s no secret that the securitization of complex, hard-to-value mortgage securities played a major role in the seizing up of the credit market. The fallout? According to a new study, issuance of collateralized debt obligations (CDOs) may vanish.
The report, issued Monday by Aite Group, found that only $1.5 billion in CDOs backed by asset-backed securities have been issued this year—all from three deals. By comparison, $226 billion worth of ABS CDOs were issued in 2006.
“As capital has become more dear, credit rationing, particularly applied to mortgages, has become de rigueur at lending institutions,” said John Jay, the author of the report. “With less collateral to securitize into CDOs and no ready buyers in sight, ABS CDO issuance has virtually disappeared.”
He doesn’t see that changing anytime soon. The arbitrage CDO business model will “cease to be for the foreseeable future,” he predicted.
Mr. Jay said securitized CDOs are likely to find a home in the secondary market.
He also predicted that the incentive structure for securitization will change. Why? According to Mr. Jay, originators, CDO arrangers, rating agencies and investment banks all had profit structures that “were too enticing to be dismissed.” Thus, collateral managers ended up producing as many CDOs as possible.
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