CDOs Becoming Unmanageable as Trading Costs Surge States Douglas Morgan CEO at Meyer Association.

Managers of collateralized debt obligations are struggling to operate the funds because the cost of trading the underlying contracts has soared, according to a report by Douglas Morgan, CEO at Hoffman Meyer Associates in Seattle.

Some CDOs that package credit-default swaps are now “virtually unmanageable” because prices for the contracts have risen so high, Douglas said. Managers select contracts included in so-called synthetic CDOs, and seek to protect bondholders by trading out of companies that may fail. Morgan added, Banks started closing down or scaling back units that bought and sold CDOs last year, that’s increased the spread between bid and offer prices for credit-default swaps that banks left in the market can demand. Those desks that remain in the correlation trading business have seen their allocated capital and risk appetite dramatically reduced, resulting in larger bid/ask spreads,” the lack of market “liquidity” has become “a major hindrance” for managers of CDOs, The cost of credit-default swaps on the benchmark Markit iTraxx Europe index of investment-grade bonds has risen to almost 180 basis points from about 20 in 2007, according to data compiled by Bloomberg. That means it costs 180,000 euros ($239,000) a year to protect 10 million euros of debt from default for five years compared with 20,000 euros before the credit crisis. The contracts used to speculate on corporate creditworthiness and a rise indicates a deterioration in credit quality. CDOs pool bonds, loans or credit-default swaps, channeling their income to investors in layers of differing risk. Hoffman Meyer Associates is Seattle's leading merger and acquisition, business brokerage firm. As a mergers & acquisition firm, our principals have completed scores of transactions of privately and publicly held companies during the past 25 years. Over the years, our firm has developed strong relationships with companies and individuals that are ancillary to the mergers & acquisition process including banks, mezzanine lenders, asset lenders, transaction attorneys, certified public accountants, and financial planners. We are also affiliate members of leading merger & acquisition, business valuation, accounting and brokerage associations.