Asset Backed Securities

Carrick Mollenkamp and Serena Ng of the WSJ report that in recent years, as home prices and mortgage lending boomed, bankers found ever-more-clever ways to repackage trillions of dollars in loans, selling them off in slivers to investors around the world. Financiers and regulators figured all the activity would disperse risk, and maybe even make markets safer and stronger. Then along came Norma. Norma CDO I Ltd., as its full name goes, is one of a new breed of mortgage investments created in the waning days of the U.S. housing boom. Instead of spreading the risk of a global home-finance boom, the instruments have magnified and concentrated the effects of the subprime-mortgage bust. They are now behind tens of billions of dollars of write-downs at some of the world’s largest including the $9.4 billion announced last week by Morgan Stanley. Norma illustrates how investors and Wall Street, in their efforts to keep a lucrative market going, took a good idea [...]

Sree Vidya Bhaktavatsalam of Bloomberg reports that Merrill Lynch & Co. was subpoenaed by Massachusetts regulators after the value of collateralized debt obligations the brokerage firm sold to the city of Springfield plunged 91 percent because of losses tied to subprime mortgages.Secretary of State William Galvin yesterday issued the request for information to New York-based Merrill. Galvin, the state’s top securities regulator, said in an interview today he wants the names and details of the CDOs by 3 p.m. Jan. 10. Merrill said it will cooperate with the investigation. To read full article click here. […]

Jody Shenn of Bloomberg reports that State Street Corp., BlackRock Inc., Societe Generale and Deutsche Bank AG units are among 28 managers of mortgage-linked collateralized debt obligations deemed at risk of being unable to fully pay off their most-senior classes.About $64 billion of CDOs, which repackage pools of assets into new securities with varying risks, have experienced so-called events of default since mid-October after a slump in the credit quality of their holdings, according to data sent to clients yesterday by Charlotte, North Carolina-based Wachovia Corp. analyst Justin Pauley. Harding Advisory LLC and Tricadia CDO Management LLC each manage five of such failing deals, the most. To read the full article click here. […]

Nicholas Rummell of Financial Week reports that there’s plenty of blame to go around in the current credit crisis, but owners of mortgage-backed securities looking for someone to pin the mess on maybe going after one target in particular: Wall Street firms that packaged the securities into collateralized debt obligations. This week, charities and municipal councils in Australia sued a subsidiary of Lehman Brothers over risky CDOs that were sold to the councils in violation of investment guidelines. Most CDO lawsuits so far have been brought against the sellers–investment banks such as Goldman Sachs and Bear Stearns–by shareholders who allege the investment vehicles’ risks were never properly disclosed. But the other litigation shoe to drop in the CDO implosion will involve legal claims against banks and hedge funds by institutional investors, including other hedge funds and pension funds, experts predict. […]