Nov 24, 2009
By Oliver Wright Esq.
Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product.
of a portfolio of fixed-income assets and divide the credit risk among different tranches: senior (rated AAA), mezzanine (AA to BB), and equity (unrated). Losses are applied in reverse of seniority, thus junior tranches throw off higher coupons (interest rates) to compensate for the imcreased risk. CDOs are vital funding vehicles for portfolio investments in credit-risky fixed income assets. The courts are finally beginning to understand the loan-securitization process, as well as the nature and extent of the involvement of the various parties to these transactions. Because there are more parties involved in a mortgage loan securitization, as well as more documents to comply with, there are more chances to misstep and get sued under any number of lender liability theories.
