Thursday, December 27, 2007

Opera Buffa: From AAA to CCC

The Wall Street Journal has an excellent graphic on how mezzanine CDOs like Norma, originally rated AAA-A when issued in March 2007, went from 100 to nearly worthless within months. When the WSJ page appears click (launch content) and the graphic will start.

For opera lovers, Norma by Vincenzo Bellini is probably the most demanding role for any soprano. It was the signature role of the incomparable Maria Callas who performed it 89 times in a career spanning 300+ appearances.

You can imagine what she would have thought of naming a slapstick CDO after it...opera buffa, perhaps?

P.S. In the opera, Norma almost murders her children and eventually commits suicide by throwing herself on the funeral fire consuming her lover. Hmmm... I think there must be a few opera lovers in the financial engineering field. Perhaps the CDO name was a warning? Notice the dagger...

Maria Callas as Norma (Teatro alla Scala, 1955)


  1. I read the WSJ's article and thought it excellent, disagreeing with Yves Smith at Naked Capitalism. It has a comment from Yuri Yoshizawa of Moody's that shows how weak Moody's is, "the firm figured some of the mortgage servicers would be better than others at handling problematic loans". Who cares who is the servicer? If I have two mutual funds, one 80% IBM and 20% MSFT, the other 75% IBM and 25% MSFT, doesn't Moody's realize these funds returns will be highly correlated no matter who manages them? Vanguard, T. Rowe Price, etc.. The same with the underlying mortgages.
    Ann Rutledge of R&R realized, "Everyone was passing the risk to the next deal and keeping it within a closed system". She gets it now.

  2. The graphic was great but it left out a vital element for understanding why CDO losses have been toxic -- the role that leverage has played at various levels of the CDO structure. My knowledge of such arcane pieces of financial engineering is limited but I had assumed that both the RMBS and the CDO itself acquired their "assets" with substantial margin.

  3. Plain vanilla CDOs don't utilize leverage. It is when CDOs are acquired by SIVs or other leveraged speculators (eg hedge funds) that leverage enters the picture.

    However, there are other types of CDO-type products that use beta-type leverage (not borrowing), exposing them to much greater volatility vs. the ultimate asset they benchmark to. For example, a synthetic residential CDO made up of CDS on CDOs will be much more volatile than the ultimate asset, which is pool of home mortgages and thus the price of homes.


  4. Wow, a little bit of knowledge is dangerous--to anyone willing to listen...

    But here are a few questions that pop to mind. How the hell does anyone know the value of these bonds? Is there a clear trail to the origen of creation?

    Who owns or has title (power to execute foreclosures e.g.) of the original mortages?

    At what point do these various bonds unravel? When entities that initiated the bonds default on interest payments?

    And finally this probably relates to the first question, who determines (what metrics are used) what the real gains and losses are in these final tranches?

    I don't mind just being referred to a basic primer to educate me either.

    Thanks All

  5. For your operatic amusement:

    "All the Great Operas in 10 Minutes"

    Note the rolling body count.

  6. Dear eva,

    I KNEW IT! Making CDOs is just like opera, after all:

    Lying, theft, seduction, rape, heartbreak, death wish, suicide, people on fire - and in the end all the Gods die!

    I hear the next CDO is going to be called "The Rise and Fall of The City of Mahogany"... very apt. I had to sit thru it ages ago. No offense to opera buffs, but it seemed like torture at the time. Worse than "Don Carlo", and they burn someone at the stake at the end, on that one.

    Thks for the link, it was fun.

  7. Marcus, where are you? You seem to be looking for information, not opera or ideology. That makes you special. We have a book but people say it's not basic. I'd be happy to cut & paste some answers to your questions from my lecture notes, if you email me at