With Memories of Financial Chaos Still Fresh, Selling CDOs Gets Tough (MS) (JPM)
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Having exacerbated bank losses during the global financial meltdown of 2009, at least two financial firms are scrapping plans to sell a derivative after failing to find investors will to take the risk.
The Financial Times reported today that JPMorgan (NYSE: JPM) and Morgan Stanley (NYSE: MS) will not move forward with plans to sell collaterlized debt obligations (CDOs). The two banks were planning to create synthetic CDOs after a few investors expressed interest to put money in higher-yielding assets.
Synthetic CDOs pile credit default swaps into an investment vehicle, then divide up the assets into tranches with varying levels of risk. The assets lever-up an investors return on the underlying loans and/or bonds. There are three levels: senior, which is the least risky; mezzanine, the middle part; and ground-floor equity tranches. Investors were said to have been not interested in the senior level.
About $61 billion of CDOs were sold in 2006, the height of sales. Shares of both banks are higher in early trading Monday.
The Financial Times reported today that JPMorgan (NYSE: JPM) and Morgan Stanley (NYSE: MS) will not move forward with plans to sell collaterlized debt obligations (CDOs). The two banks were planning to create synthetic CDOs after a few investors expressed interest to put money in higher-yielding assets.
Synthetic CDOs pile credit default swaps into an investment vehicle, then divide up the assets into tranches with varying levels of risk. The assets lever-up an investors return on the underlying loans and/or bonds. There are three levels: senior, which is the least risky; mezzanine, the middle part; and ground-floor equity tranches. Investors were said to have been not interested in the senior level.
About $61 billion of CDOs were sold in 2006, the height of sales. Shares of both banks are higher in early trading Monday.
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