CDO Complexity in Context

Thought you were the only one who really doesn’t understand collateralized debt obligations or, better yet, CDO-Squareds?

Rest easy. No one really does.

The Alea blog pulls this fascinating quote from a speech by Bank of England official Andrew Haldane (emphasis mine):

To illustrate, consider an investor conducting due diligence on a set of financial claims: RMBS, ABS CDOs and CDO^2. How many pages of documentation would a diligent investor need to read to understand these products? Table 2 provides the answer. For simpler products, this is just about feasible – for example, around 200 pages, on average, for an RMBS investor. But an investor in a CDO^2 would need to read in excess of 1 billion pages to understand fully the ingredients.

Haldane concludes:

End-investors in these instruments were no more likely to know the name of the companies in their portfolios than the name of the cow or pig in their exotic hot dog.

Sausage analogies are about right.

(h/t Felix Salmon)

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.