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UBS brings transparency to murky CDOs

Issuer: Diversified Global Securities Limited (UBS Principal Finance)Type of deal: Cashflow arbitrage CDO of CDOsAmount: $236.95 millionDate: December 13 2001Underwriter: Société Générale

It sometimes seems that the world of finance is nothing but a series of opaque ruses designed to exemplify the expression mutton dressed up as lamb. However, after 18 months of bursting internet bubbles, crises at former corporate darlings such as Xerox, Lucent Technologies and Enron, and a belated admission from the Federal Reserve that a nine-month-old recession undermines its hopes for a soft landing, a deal comes along to redress some of the balance.

It belongs to a product segment that epitomizes the mystery of finance - collateralized debt obligations (CDOs). This deal, $236.95 million of securities issued by UBS Principal Finance, is from an even more mysterious sub-sector - it's a CDO of a pool of CDOs.

But unlike its brethren, whether straight collateralized debt obligations or CDOs of CDOs, this deal is totally transparent and also static. In other words, investors were able to check out both the CDOs in the collateral pool and the high-yield assets in the underlying CDOs first. Also, they can check it on-line, and have a guarantee that the managers of the fund - UBS Principal Finance - cannot, defaults aside, tinker about with the portfolio.

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