The reason to issue

The initial reason for collateralisation of debt was the same as that for any securitisation, to free up more of the banks’ balance sheets. But since the mid-1990s CDOs have become a way for originating firms to arbitrage rating inefficiencies

An apparent paradox associated with the rapid expansion of the CDO market is that it has come against a backdrop of a performance track record that can hardly be said to have been distinguished. A study published by Moody’s in February 2003 found that between 1991 and 2002, CDOs had what the agency described as an “extremely high downgrade rate” (of 10.9%) and a very low upgrade rate (of 0.6%). That, Moody’s explained, was “primarily due to the extraordinary number of downgrades and defaults in