We all have heard that one of the big culprits in the credit crisis was the collateralized debt obligation (CDO). CDOs are notes backed by baskets or cohorts of different types of receivables. The notes can be backed by residential mortgages, or commercial mortgages, or student loans, or credit card receivables or auto loans, etc (or a mixture of all the above). It is the cash flows from those receivables, not some end borrower, that services the CDO notes, i.e. pays interest and amortizes the principal on the notes.

I don’t want to go into the details about CDOs here or their role in the credit crisis because many other writers have gone into this exhaustively elsewhere. Suffice to say CDOs (or asset backed financing/securitizations) are actually very important and effective ways of financing certain receivables pools (of effecting what is known as ‘non-recourse’ finance). And yet there were fairly obvious issues with many CDO structures before the crisis: their excessive structural complexity (the notes were broken into too many tranches); the questionable credit quality of the underlying assets; the use of too many different types of underlying receivables; the fact that those rating the notes (the rating agencies) were effectively in bed with the originators of the notes; the overly aggressive selling methods of CDO tranches by swarms of brokers; etc. (read more…)

With an eye on what lies ahead for the industry in 2015, SmartBrief conducted an e-mail interview with Jeffery Weaver, Chairman of the International Association of Credit Portfolio Managers. Mr. Weaver is an Executive Vice President and Group Head of CPM at KeyCorp.

The role of Credit Portfolio Managers in the management of credit exposures has evolved since the end of the Great Recession and one of the most significant changes is the expansion of regulation. How has this heightened regulatory scrutiny changed the role of risk management?

The role of credit portfolio management has become more strategic to the firm as the perpetual assessment of emerging risks and their potential impact on the credit portfolio is under taken.

In order to deliver high quality stable earnings with a sustainable growth profile, risk must be monitored across the organization in a collaborative and transparent manner. The optimally performing bank of today promotes prudent and effective decision making premised on a predefined set of strategic operating principals – while maintaining alignment with a risk management philosophy that has broad support by the firm’s Board of Directors, senior management, and its primary regulators. (read more…)

A collection of stories from SmartBrief publications and around the web…

The editor of The Economist says farewell: John Micklethwait departs The Economist bound for Bloomberg. I won’t even try to summarize his farewell message. It is too good. Read the whole thing.

How the next editor got the job: Gideon Litchfield writes for Quartz about the process The Economist employed to select Zanny Minton Beddoes as the new editor. Litchfield, who was also a candidate for the job, offers unique insight on the refreshingly straightforward way The Economist handled the search.

Food for thought from Davos: With the glitz and glam always stealing the headlines in Davos, many people overlook some of the research the World Economic Forum actually disseminates – during the conference or throughout the year. Kirill Shakhnov from the European University Institute shares some interesting research with this paper: How wealth inequality entices talent into finance. (read more…)

CME Group recently unveiled the Futures Institute, an online platform for education, market research and simulated trading of futures. The platform features a mix of live classes, interactive modules, market research and training materials and engages participants with multiple trading strategies, including testing and simulation capabilities.

The platform’s Futures Challenge, which takes place every month, allows participants to compete in a simulated environment tracking 36 of the most liquid futures contracts across six asset classes: Energy, Metals, Interest Rates, Agriculture, FX, and Equity Indexes. The Futures Challenge incorporates training modules to educate traders on how to create trade plans, manage risk and analyze markets from both fundamental and technical perspectives.

Ahead of the first Futures Challenge, which kicks off the first week in March, SmartBrief chatted with Mark Omens, senior director and head of retail sales at CME Group, to learn more about the site.

SmartBrief: What is the genesis of this site? (read more…)

Welcome to Day 3 of SmartBrief’s roundup of financial news coming out of the World Economic Forum’s Annual Meeting in Davos, Switzerland.

Blankfein on the reality of regulation: Goldman Sachs chairman and CEO Lloyd Blankfein told CNBC his firm is always thinking about regulation and how it affects things like technology acquisition. On whether banks are under regulatory assault, Blankfien responded, “No choice, no problem. I don’t have to sit here and ruminate on about whether its good or its bad or I like it or not. It is what it is.”

‘Pandemic bonds’ could be a panacea for next pandemic: Gillian Tett writes in the Financial Times writes about the concept of ‘pandemic bonds’ aimed at helping finance more effective and efficient responses to global health crises. The idea, which is backed by World Bank boss Jim Kim, would see bonds issued to help governments, NGOs and other organization,. “This could help cash-strapped governments finance measures to beat disease,” Tett writes. (read more…)