World Famous Comics: Collateralized Debt Obligations and Structured Finance : New Developments in Cash and Synthetic Securitization
Collateralized Debt Obligations and Structured Finance : New Developments in Cash and Synthetic Securitization
By: Janet M. Tavakoli Publisher: Wiley Average Rating: Binding: Hardcover Number of Items: 1 Number of Pages: 352 Publication Date: August 28, 2003 Studio: Wiley
Product Description: Praise for Collateralized Debt Obligations & Structured Finance
"Caveat emptor! Never in the history of finance has this warning been more appropriate. With the development of CDOs, credit derivatives, and other esoteric structured finance techniques, market participants-the savvy as well as the novice-are exposed to a bewildering array of new ideas, concepts, and structures. Janet Tavakoli has tackled these subjects in an outstanding mixture of exposition, mathematics, and skepticism. A must-read for anyone who plans to play in these markets." -Jack Caouette Vice Chairman, MBIA Insurance Corporation
"A timely and comprehensive survey of the latest developments in structured finance, particularly given the rapid pace of change in the last few years. The author's depth of knowledge and wide experience are conveyed clearly to the reader. At a time when the industry's ability to meet the complexities of the differing requirements of market participants is under challenge from both the events of the last cycle and the authorities, the insights offered in this book are especially valuable." -Mark Hale Group Strategist, Ansbacher & Co., Ltd.
"Structured finance is central to the continued development of active credit portfolio management. In this book, Tavakoli not only provides an authoritative account of many of the structured finance products employed by portfolio managers, but also addresses, in a forthright manner, a number of the `burning issues' affecting the industry in a post-Enron world." -John Cross Global Head, Portfolio Management, Standard Chartered Bank
Intriguing Expose of CDOs ^ The volume of collateralized debt obligations has ramped up so rapidly in recent years that the level of expertise needed to transact business in these products competently is very uneven. Experts often disagree on the basic terminology. Both of these related problems are linked to a third problem - opportunities for fraud. Tavakoli addresses this market's growing pains in this book.
Tavakoli tackles terminology at the very beginning and objects to the lazy practice of using the term "arbitrage" to refer to any hedged position that has made money such as referring to a long bond position being "arbitraged" by a short sale. A true arbitrage is a risk-free profit opportunity. Arbitrage language in the CDO context helps parties hide from themselves the fluctuating nature of the profit (and loss) conditions that they actually face. This is also true of "delta" hedging.
This is a recurring theme in this book: Participants first need to get the words right in order to get the concepts right, and they have to do both in order to get the numbers right. Another example is the "dual currency swap." A borrower receives one currency, pays coupons in another currency and has a final exchange of principal in a third currency. "Borrowers often perform this swap when they want to lower their all-in borrowing costs by taking on more currency risk," Ms. Tavakoli explains.
But the term "dual currency swap" also is used quite broadly for transactions in which fixed-rate bonds denominated in one currency simply are swapped for floating-rate bonds denominated in another. Ms. Tavakoli suggests that her readers should not assume that market professionals know the correct terminology. "Ask for the cash flow structure in writing, so you can determine the cash flows to see if they are consistent with the terminology as you understand it."
Tavakoli introduces a valuable distinction between timing and frequency, both terms important to the clear understanding of the cash flow that a contemplated transaction will produce. "It is not sufficient to state that I will get all of my cash back within the year," Ms. Tavakoli writes, explaining the distinction. "This is merely the timing of my ultimate receipt of cash flows. I want to know the frequency. Will I receive the cash flow in one lump sum toward the year-end, in equal monthly payments, or in a varied stream of payments over the course of the year? I'm not indifferent. This is why I emphasize timing and frequency."
This is an intriguing book. The market in collateralized debt obligations is complicated, subject to a miasma of human frailties. Hedge funds have entered this market in droves, particularly the synthetic market, and banks curry their favor as customers and competitors. As Tavakoli points out "find ways to become comfortable with alternative investors ... because this customer base is a key consumer of leveraged risk. They do not have the same regulatory capital constraints as banks."
Hedgers Manual ^ This book gives the best explanation I've ever read of the cash and synthetic collateralized debt obligations markets. Especially clear is the extra cash injection due to the large synthetic super senior tranche, which does not exist in the cash market. Tavakoli's book is the only one that discusses the language arbitrage and rating ambiguity. As a quant and delta hedger, I would have liked more on correlation trading and delta hedging, since this book pre-dates this, but the overview of how the cash flows work is excellent.
Creates More Questions than it Answers ^ Poorly written - poorly edited This book needs a complete rewrite Its more a collection of disjointed notes and facts than a book If you don't understand CDOs before you read it - you won't after you read it
Where was the editor? ^ As a novice to securitizations, I can't speak about the merits of this book in comparison to its peers. However, I will say that it is neither a reference book nor a novel. The overall structure and organization of the book was horrendous with stories leading nowhere and technical examples blurted out onto the page without thought to a fundamental theme or why they were offered. An example is not a good teaching lesson if it doesn't relate to a fundamental point.
I don't blame the author because she is obviously skilled and well informed. I do blame the editor for not reviewing the book more carefully. Wiley shame on you!
Excellent Resource for Investors ^ For investors who need to know more about structured finance including new synthetic securitizations using credit derivatives technology, this book is a great resource.
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