Junk mortgages were bundled, given the highest credit ratings, then sold to investors in vehicles like collateralized mortgage obligations.
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One focus for Feltus and Castro is collateralized mortgage obligations.
Since nobody seems to know what is inside all those collateralized debt obligations and their kindred collateralized mortgage obligations--mega-investment pools that bundle subprime loans--2007 audited results should help bolster confidence when they're released sometime in the new year.
Stan O'Neal, the chief executive, has tried to take the firm into all of these new areas like collateralized debt obligations, mortgage-backed securities.
In the domain of derivative contracts like credit default swaps or auction-rate preferreds (which even George Soros didn't know existed) or complex collateralized debt obligations of mortgage-backed bonds, there was a "failure to know what isn't known, " and the ramifications for not knowing were huge.
The catalyst: ratings agency downgrades on structured products like collateralized debt obligations containing subprime-tainted mortgage collateral.
The company caters to fund managers and institutional investors trading in illiquid assets like private company stock, bankruptcy claims, loans, mortgage-backed securities and collateralized debt obligations.
The insurer had painted itself into a corner by writing credit default swaps on mortgage-related securities and collateralized debt obligations that were set to pay out in the event that those investments soured.
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Lehman's exposure to mortgage- and asset-backed securities and collateralized debt obligations is 400% of its tangible common equity, according to research by Sanford Bernstein.
Moody's also raised concerns about deterioration in MBIA's insured portfolio, given deterioration in mortgage performance data, particularly home equity and asset-backed collateralized debt obligations.
From mortgage-backed securities to municipal bonds, sovereign debt to collateralized debt obligations, ratings agencies have notoriously mispriced risk over the last decade, and nearly all of us have paid the consequence.
Magnetar Capital LLC, another hedge-fund firm that, like Paulson, was heavily invested in collateralized debt obligations in 2007 also has been working to reassure investors that it believes its mortgage-linked investment strategy was sound and can withstand regulatory scrutiny.
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