Rise and fall of Merrill's CDO king
Posted
Oct 25 2007, 03:28 AM
by
Jon Markman
Rating:
There's an awesome story in the Wall Street Journal tonight about the guy who appears to have been a key driver of Merrill Lynch's disastrous decision to become No. 1 in the underwriting of collateralized debt obligations, or CDOs.
The story explains the birth of CDOs and how they were sold as a way for fund managers to obtain more dividend income with just a little extra risk during the mid-2000s when Treasury bill yields were low. It tells the tale through the perspective of pioneering salesman Christopher Ricciardi. The story explains how the exotic derivatives -- which heap leverage on top of leverage on top of leverage -- moved down the food chain from smart-money managers in Manhattan who may have really understood the risks they were taking, to European and Asian managers who didn't really understand them very well, and finally, near the end, to individuals who really didn't have a clue.
The "structured investment vehicles," or SIVs, you have been hearing about are basically warehouses of these CDOs. To the extent that they are crumbling, and may be responsible for massive losses not just at Merrill but at Citigroup and elsewhere, we really need to understand how they came into being and how they will affect the banking biz going forward. Key quote:
Everybody was talking about the wonders of all the CDOs and the new innovations," says Stacey Nutt, the president of ClariVest Asset Management LLC in San Diego. They're discovering that these instruments have instead spread risk to parts of the financial system, such as hedge funds and foreign investors, that aren't regulated. "You end up with more risk than you had 15 years ago," Mr. Nutt says. "It's a very scary situation."
