This Day On The Street
Continue to site
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

Bear Stearns Shakes the CDO Honey Pot

"There are huge transparency issues,'' says Janet Tavakoli, a structured finance and derivatives consultant and the author of a book on CDOs. "In some cases, investors have been taken in by hype. Some investors don't know what they are getting into."

Tavakoli says buyers typically only care about how much yield a CDO will throw off. Rarely do they inquire about how the underlying assets will be valued, or whether there's a secondary market for trading them.

Increasingly, CDO buyers are crying foul about the quality of the information they are getting from Wall Street.

In June, Bank of America (BAC - Get Report) settled a lawsuit filed by Italy's Banca Popolare di Intra, stemming from the sale of $80 million in CDOs. The Italian bank claimed that BofA had misrepresented the risk associated with the securities. Earlier in the year, Barclays (BCS) reached an out-of-court settlement with Germany's HSH Nordbank over a similar issue.

Last month, Royal Bank of Scotland sued Weil Gotshal & Manges, a big New York law firm, over its structuring and documentation for a six-year-old CDO. The lawsuit, filed in London, stems from Weil Gotshal's role as the legal adviser on the Sabre Funding No. 1 CDO for Natwest, a division of RBS.

"The buyer is at the mercy of the underwriter to know what the valuations are,'' says Gary Kendall, president of CDO2, a London company that sells a software that helps investors independently price CDOs. "It's an industrywide problem.''

To understand why CDO pricing and valuation can be such an opaque process, consider the composition of one of the CDOs that Spitzer's office has requested information on from Bear Stearns: the Trainer Wortham First Republic CBO II. This 2002 CDO is a hodgepodge of mortgage-backed securities, that are in turn backed by mortgages on single-family homes, mobile homes, commercial properties and home equity loans.

Underwritten solely by Bear Stearns, the CDO raised about $335 million for First Republic (FRC - Get Report) and its investment advisory firm Trainer Wortham, which manages the underlying portfolio.
3 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $15.58 0.00%
FRC $64.08 0.00%
AAPL $112.12 0.00%
FB $93.24 0.00%
GOOG $643.61 0.00%


Chart of I:DJI
DOW 17,084.49 +33.74 0.20%
S&P 500 2,014.89 +15.91 0.80%
NASDAQ 4,830.47 +19.6820 0.41%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs