Fun With CDOs–Contradiction in Terms?

This brings new meaning to the term “global community.”  It’s a pandemic of complex structured finance instruments!

Circular CDOs: Contagion in the Financial Industry

The recent financial meltdown had many culprits. To make matters worse many of the investment banks bought and sold suspect mortgage securities with each other. The cross-ownership of securities, based on failing mortgages, increased the speed and the breadth of the collapse.

We obtained CDO cross-ownership data from this ProPublica page: Interactive: CDOs’ Interlocking Ownership. By putting this data into our network analysis program, InFlow, we performed additional diagnostics. ProPublica focuses on CDO: Tabs 2007-7 because it has the most cross-ownership links. We know, from 20+ years of doing network analysis, that the number of links a node has may not matter — it is where those links lead that matters! After all, the golden rule of networks is “Location, Location, Location” and not “quantity, quantity, quantity.” Applying contagion principles, we learned while working with the Centers for Disease Control [CDC], it is revealed that the following CDOs are much more likely to infect the rest of the network if they contain failed securities: GSCABS CDO 2006-2 MLTD or West Trade Funding CDO I.

(note at the link the “fit to screen” and “zoom” features)


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