Creditflux magazine has some interesting numbers out about the synthetic CDO
market, as reported by Paul
Davies in the FT today:
Sales of public and private synthetic CDOs grew to $450bn in notional terms
last year compared with $224bn in 2005, according to data from Creditflux,
an information and news service that has the best access to the hard-to-track
On the risk-weighted basis – where the value of a CDO is calculated by multiplying
the tranches by their risk weight – volumes grew from $648bn to $1,554bn.
I’ll do the math so you don’t have to: the risk weight on synthetic CDOs has
increased from 2.89 last year to 3.45 this year. What do these numbers mean?
According to Davies, they mean this:
Investors are increasingly purchasing ultra-risky slices of complex derivatives
known as "synthetic" collateralised debt obligations (CDOs)
"Ultra-risky"? Is that, you know, well-defined? Besides, are synthetic
CDOs particularly complex? Really, they’re just pools of assets which have a
fixed income, only the assets are CDSs rather than bonds.
It’s easy to look at skyrocketing risk-weighted exposure to synthetic CDOs
and get worried. But it’s also worth remembering that every dollar an investor
in these instruments receives is a dollar spent by somebody insuring himself
against a credit event. I’m going to try to find out what those 2.89 and 3.45
numbers actually refer to, but in the mean time I’ll remain a bit more sanguine
than Paul Davies.