The security formerly known as a CDO

May 19, 2008


“O, be some other name! That which we call a rose by any other name would smell as sweet.” –Romeo and Juliet

Debt analysts told an audience at New York University last week that the maligned securities known as collateralized debt obligations can still help diversify investment portfolios and disperse risk when used correctly. But first the markets will have to come to terms with the negative aura surrounding CDOs, which have been blamed for their role in the housing and credit crisis.

“CDOs will be back at some point. They might have a different name…,” Stanford University professor Darrell Duffie said, trailing off to a roomful of laughter at a credit conference sponsored by Moody’s and NYU.

Duffie, president-elect of the American Finance Association, has a suggestion: “CRTs,” or Credit Risk Transfer products. That’s how he referred to CDOs and other securitized products throughout his keynote presentation, “Credit Risk Transfer: Implications for Financial Efficiency and Stability.”

A name is no small thing — just ask author and fund manager Antoine van Agtmael. In 1981, he pioneered investing in what was then known as the “Third World.” But as that didn’t sound very appealing, he created a new term. Ever heard of a little something called “emerging markets?”

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