from Follow the Money

I guess I am not the only one who sometimes calls CPDOs C3POs

December 29, 2006

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Or for that matter, sometimes says C3DOs rather than either C3PO or CPDOs.  I used to think that no one loved acronyms more than the US government, but then the structured finance boom came along.  

I'll second Gillian Tett's comment about the accelerating pace of change

Another factor driving the trend is broader acceleration of the global financial innovation cycle. Low interest rates have left investors scrambling to find new ways to earn returns – and banks are responding by inventing products at such a furious pace, they barely have time to think up names.

Back around 2002 or 2003 I thought I had a pretty good understanding of how the market managed credit risk, though admittedly one largely derived from studying the market for dollar and euro bonds issued by emerging market sovereign borrowers.   In 2005, I struggled to understand how the market had stopped just betting on credit risk and started to be bet on the correlation between different credits (see this FT retrospective).  And in 2006, I more or less gave up trying to really understand CPDOs (let alone how CPDOs differ from ALDOs or reverse CPPIs). 

Trying to track petrodollars from secretative Gulf states and the latest gizmo dreamed up by the world's best financial engineers was more than I could handle! 

I remain convinced that there is a reason why the growth of emerging market reserves (and resulting low yields on many fixed income assets) and the growth in the stock of CDSs (credit default swaps), CDOs (collateralised debt obligations), LCDSs (loan CDSs), ABCDS (a CDS of an asset-backed securities), CLOs (collateralised loan obligations), ECOs (equity collateralised obligations), CDO2 and CDO3 (Gillian Tett: "CDOs of CDOs of CDOs") and CPDOs (constant proportion debt obligations) has been highly correlated.    

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