Thanks for sharing EmpressRealm45 - I am familiar with the CDO market and think this is a great deep dive. One thing that changed everything was the ability to short CDO tranches - there was firm called ABX that made markets is reference tranches and analysts who knew a ratings was wrong or that the underlying collateral was toxic could use the ABX market to short via swap contracts. Here are couple interesting footnotes in the report you cited:
In the CNBC documentary, “House of Cards,” reporter David Faber travels to the small town of Narvik, Norway, which invested $200 million in American CDOs, lured in by their AAA ratings and the assurance by Citigroup of their safety. These CDO bonds are now essentially worthless, and the town has had to close schools, slash expenditure to the elderly, and cut back on fire department hours. The Mayor of Narvik says that she has “learned not to trust nice man in Armani suit,” although this lesson has come too late to save her city’s budget.
In his testimony before congress, Frank Raiter, a former RMBS analyst at S&P, testified that he was often asked to give RMBS ratings for CDOs without essential credit information. According to Raiter, the managing director of CDO ratings, Richard Gugliada, said: “Any request for loan level tapes is TOTALLY UNREASONABLE!! Most investors don’t have it and can’t provide it. Nevertheless we MUST produce a credit estimate…It is your responsibility to provide those credit estimates and your responsibility to devise some method to do so.” (Testimony before the Committee on Oversight and Government Reform, October 22, 2008).
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