Introduction to Securitization

RESECURITIZATION OR STRUCTURED FINANCE CDOs

An interesting application of arbitrage CDOs is resecuritization: the securitization of securitization investments. These are called structured product CDOs or resecuritizations. The collateral for resecuritizations is mostly subordinate tranches of RMBS, CMBS, CDOs, and other ABS transactions.

The genesis of structured finance CDOs is quite obvious—as arbitrage transactions search for assets which provide relatively higher rate of returns with a given rating, a structured finance security is an ideal choice. Quite often, the spreads on a BBB ABS are substantially higher than those on a BBB bond. Besides putting up structured finance, CDOs also served the motive of investment banks to have adequate supply of liquidity in the lower-rated tranches of securitization transactions.

Growth of Structured Product CDOs

In Chapter 11, we noted the sharp rate of growth in structured finance CDOs. From virtually zero in 1998, the structured product CDO market recorded a volume of about $10 billion in 2000, nearly 10% of the entire CDO market. In 2006, the percentage of structured finance CDOs zoomed to nearly 60% of the total market—out of a total volume of $549 billion, structured finance CDOs added to $312 billion.

In the 2007 subprime crisis, structured finance CDOs have been the prime victims. This is obviously because these CDOs have made substantial investments in subprime mortgage loan securitization transactions.

Assets of Structured ...