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Toxic Waste Watch Beware Cdo Backed Abcp

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by Felix Salmon
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Nov 07 2007 12:00am EDT

Toxic Waste Watch: Beware CDO-backed ABCP!

Since when do CDOs borrow money? I'm obviously rather behind the curve here, since I thought that a CDO was basically an unlevered entity which invested in debt. When it got income from that debt, the income would go first to people holding the super-senior tranches, and then waterfall down. If you want extra risk in CDO form, that's easy: you just buy the lower-rated tranches. There's no need for leverage.

Unless you're Citigroup, it seems. Sam Jones has done some close reading of Citi's 10-Q:

In Citi’s 10-Q filing on Monday, the bank repeated its weekend disclosure of $43bn in CDO super senior debt “backed primarily by subprime collateral.” The crucial point being that most of that was made up of:

…approximately $25 billion in commercial paper principally secured by super senior tranches of high grade ABS CDOs.

You knew that asset-backed commercial paper (ABCP) was having problems. You knew that CDOs were having problems. What you didn't know, until now, was that Citi had managed to combine the two, to create CDO-backed ABCP. Yikes! (Or if you did know, you didn't tell me.)

Is anybody else doing this?

(Via Smith)

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