Risk conference speakers predict more gloom for CDO buyers

The problems of the collateralised debt obligation (CDO) business have been highlighted at Risk magazine’s Credit Risk Summit 2002, which opened in London today.

Recent years have seen the proliferation of highly structured, highly leveraged, CDO structures. But the bear market and record default levels have created a toxic legacy for many investors – and market practitioners speaking at the Credit Risk Summit do not believe the CDO market is over the worst.

“Most CDO structures done in the last three or four years will be tested in some way, either by the rating agencies, banks’ own models or in terms of the underlying rationale of the deals,” predicted David Henriques, head of Royal Bank of Scotland’s global risk financing group. Henriques voiced his concern over the development of different standards for restructuring of CDOs in the US and European markets.

Gerwinn Scharmann, head of portfolio finance at Bankgesellschaft Berlin, went even further in his criticism of the CDO market. “People don’t know how to price transactions,” he said. All too often, Scharmann added, that confusion extends to the investment banks trying to sell the investments, as well as the buyers.