According to a report from Bloomberg, a financial institution which shall remain nameless is taking a 2007 collateralized debt obligation (CDO) that has been downgraded and repackaging it into new securities that it anticipates will have AAA ratings–important in marketing the new securities to institutional investors who are only allowed to buy AAA debt.
According to the Bloomberg article, Moody’s downgraded the CDO to A3 (a heartbeat away from its lowest investment-grade rating) in June after the default rate on the underlying debt rose to 7%. Supposedly banks also have been using the process with commercial mortgage-backed securities in recent weeks.
Correct me if I’m wrong, but didn’t this process contribute to the financial meltdown in the first place, and aren’t we still trying to work our way out of the problems associated with toxic assets camouflaged as diamonds? Just asking…
Filed under: Investments | Tagged: CDO, debt, toxic assets
