[lbo-talk] origins of the housing boom

SA s11131978 at gmail.com
Tue Aug 30 07:49:36 PDT 2011

On 8/30/2011 10:36 AM, Julio Huato wrote:

>> The only reason anyone ever bought a CDO is because
>> they believed it would pay off. A triple-A rating won't help
>> you if the security ends up defaulting anyway. And they
>> all understood that CDOs would not pay off if national
>> house prices fell. They bought the CDOs because - just
>> like everyone else - they believed house prices wouldn't
>> fall.
> Not sure about this, but I believe I've heard (or read somewhere) that
> large institutional investors (to pacify their shareholders, e.g.
> unions, etc., who may not be very actively monitoring the portfolios)
> have rules in their trust agreements that rely on these ratings so
> that, when these ratings are adjusted, they may trigger the automatic
> rebalancing of a number of portfolios. Since these funds are large,
> these changes can make a big splash. Is this a urban myth?

Sure. If a CDO were to lose its AAA, it probably would force some institutions to get rid of it. But nobody was required to buy a CDO just because it had a AAA.


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