Financial Advisers Haven't All Gone Cold On Cdos

The Age

Friday August 22, 2008

Vanessa O'Shaughnessy, Investment Reporter

MAJOR investment banks are washing their hands of complicated products such as collateralised debt obligations (CDOs), wary of their unpredictable returns. Even so, some investors are labelling them the "opportunity of a lifetime".

Before problems emerged in the US subprime mortgage market, CDOs and similar instruments became popular, even being bought by local government and community groups. In many cases they were viewed as defensive investments because they were widely diversified, provided a guaranteed return and were usually highly rated by agencies such as Standard & Poor's.

But some of the securities, which are backed by a pool of loans, bonds and other assets, proved vulnerable to the turbulent credit environment. As credit markets froze, some CDOs were rendered virtually worthless, at least on paper.

Deutsche Bank's director and head of communications, Kate Abrahams, said that for the past 12 months there had been no retail demand for CDOs. "We have not arranged any retail CDO issuance in the last three years," she said, explaining that a minimal amount of the bank's trade in structured finance products was in CDOs.

Similarly, a Credit Suisse spokeswoman said the bank was not a big player in the CDO market in Australia.

A senior strategist at TD Securities, Joshua Williamson, said his organisation had decided in 2006 to withdraw from all CDO products. Senior executives did not like their risk profile, he said.

But Putnam Investments' director of institutional business, Charles Wall, said some CDOs were offering the "opportunity of a generation" for long-term investors who were willing to look at the detail.

"A range of investors out there are scared because these acronyms have either burnt them or burnt others," he said. "The owners of these things are selling both the high-quality and low-quality."

Speaking at a Westpac presentation, group executive of Westpac Institutional Bank Phil Chronican said the bank continued to acquire CDOs and collateralised loan obligations (CLOs) to manage its credit-risk profile and to create structured product for clients.

"What is important is the nature of the underlying exposure that sits within these instruments," he said. "We've ensured that where we have any exposure through these types of derivatives, it's in asset classes where we actually have some knowledge."

© 2008 The Age

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