This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Bear Stearns Shakes the CDO Honey Pot

The buyer of the CDOs at issue in the SEC inquiry is Westernbank Puerto Rico, a division of W Holding (WHI), Bloomberg reported.

The estimated $700 billion CDO market could be a fertile one for Spitzer. It's developed almost overnight with little outside oversight. Five years ago, the dollar value of outstanding CDOs was just $120 million.

Since then, the structured finance product has found a ready stream of buyers in banks, hedge funds and other institutional investors all seeking higher-yielding securities to sink their money into.

The great thing about CDOs is that just about anything that produces revenue can be stuffed into the underlying portfolio that backs these securities. A typical CDO represents claims on cash flow from a combination of junk bonds, bank loans, accounts receivable, mortgage-backed securities -- even other CDOs.

In effect, a CDO is a structured finance smorgasbord that allows investors to sample a wide array of assets, some better than others. But cynics say the CDO structure provides a perfect vehicle for banks and other companies to dump their poor-performing loans and bonds on unsuspecting investors.

Critics fear the explosive growth in CDOs could spell trouble for Wall Street, since many of the institutional investors buying them are not fully aware of what they're biting into.

To compound matters, independent pricing information about these specialized bonds is hard to come by. With a limited secondary market for trading CDOs, buyers often must rely on the Wall Street firms that underwrite them for an idea on what they're worth.

And that can have big ramifications for hedge funds and banks that must periodically value their investments for any paper gains or losses. The lack of independent pricing information appears to be the issue in the Hudson United situation.

Another problem is that managers of the portfolios underlying the securities can sometimes make substitutions in the bonds or loans that serve as the collateral for the CDO, people say. This ability to make changes in the make-up of the portfolio can lend itself to potential abuse and provides another opportunity for CDO issuers to unload poor-performing assets on their investors.

2 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs