CDO woe

In his ever-interesting blog Lars Toomre writes of big lay-offs in the Wall St structured finance departments.

>On the afternoon of Wednesday August 29th 2007, rumors of pending layoffs in the structured finance areas are being reported in the media. CNBC and The Wall Street Journal are reporting that major layoffs are going to be announced and start to be executed in the week after Labor Day. Specifically, CNBC is reporting that Goldman Sachs, Lehman Brothers and Bear Stearns are planning to pare some their expensive structured finance personnel.

About 3 months ago–do you remember those heady days before most people had even heard of subprime–I went to a conference on the securitization of reinsurance risk. There was much talk then of CDOs and, somewhat to my embarrassment, I had to ask one of the zillions of bankers there what they were. His explanation sort of enlightened me, but at the same time alarmed me since they still strike me, to paraphrase Churchill, as rubbish, wrapped in junk, inside garbage, at least in risk management terms.

Mark Geoghegan writes stingingly (but still often hilariously) about this over at blog-re.com:

>Eventually the whole thing will unravel and you’ll be stuck holding the baby. Just like your consumer who you sold a 2-year fixed rate deal to when rates were 3% is now re-setting to a variable rate at over 6%, there will always come a point where you yourself can’t refinance and you can’t shuffle the default risk out of the door any more.

>When that day comes you should be ready, otherwise you might as well walk around the centre of town with a big sign saying “please kick my butt” pinned to your back.

One imponderable is whether the demise of the wilder excesses of the financial markets will halt the current slide (or plunge, if you prefer) into the soft market. Let’s see what happens by about the middle of January, after the 1/1s.