Anatomy of ABS CDO: Why Do ABS CDOs Exist?

Abstract

This paper investigates the ABS CDOs (Asset-Backed Security Collateralized Debt Obligations) market between 2005 and 2007 and answers the question of why ABS CDOs exist. The dataset used in this paper contains 516 ABS CDOs, 4,023 CDO tranches, and 79,724 securities used as the collateral of ABS CDOs. Using detailed collateral information on ABS CDOs, I find that there is a large re-securitization rate distinction between AAA- and non AAA-rated tranches. Less than 1% of AAA-rated subprime MBS tranches were used as collateral for cash flow ABS CDOs. In contrast, more than half of non AAA-rated subprime tranches were re-securitized through cash flow CDO.I also show that the reference portfolio of synthetic CDOs consists to a large degree of BBB rated subprime mortgage backed securities. As a notional amount, $94 billion out of $172 billion, which was the total collateral amount of synthetic CDOs, was comprised of BBB-rated subprime MBS tranches. It is evident that the synthetic CDO market deteriorated due to short demand in the housing sector, but there is no evidence that the cash flow ABS CDO market deteriorated between 2005 and 2007.