Norma hairballs

How a CDO works

A CDO called Norma left ‘hairball of risk’;
Tailored by Merrill Lynch

The WSJ details how a CDO called Norma that sold $1.5 billion in securities to investors in March is now worth a fraction of that – assuming buyers existed for their toxic glop, and none do.

The article also has a hugely informative Flash animation detailing how CDOs are structured. Think thousands of mortgages packed into a bond, with one hundred of those bonds comprising a CDO. In the case of Norma, it was comprised mainly of subprime mortgages because they wanted to goose the return.

“It is a tangled hairball of risk,” Janet Tavakoli, a Chicago consultant who specializes in CDOs, says of Norma. “In March of 2007, any savvy investor would have thrown this…in the trash bin.”

Yet bond rating agencies cheerfully gave this toxic waste their approval. They will no doubt be wallpapered with lawsuits for years and maybe some of those involved in this ever-widening sleazy greedfest will go to prison.

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