(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site) In his recent Mansion House speech Mervyn King, the governor of the Bank of England, focused on some of the concerns surrounding investment in CDOs and the structural implications for the financial system of their increasing prevalence. Some of those concerns may be overplayed.
Historically, CDO-squared transactions have come in for the most criticism. These instruments pool together a portfolio of underlying CDO transactions in certain circumstances, magnifying the effects of a default that might be present in more than one of the underlying CDOs.
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