Technology: Shaping Tomorrow - Subprimers' Short Memories - The Lessons Of the Losses Experienced By Lloyd's Of London In The 1980s Were Overlooked By banks Embroiled In The Subprime Crisis, Who Recklessly Issued Vast Amounts of Collateralised Debt Obliga.

Banker, The, October, 2007 by Skinner, Chris

Byline: CHRIS SKINNER

With the subprime crisis causing bank foreclosures and jitters around the world, I guess the obvious question is why did the banks not see it coming?

My answer is that the spread of collateralised debt obligations (CDOs) hid the risks.

According to a paper written in February by Joseph Mason of Drexel University and Joshua Rosner of Graham Fisher, there were hardly any CDOs in 1995 but their value had risen to more than $500bn by 2006, of which 40% were backed by residential mortgage and almost three-quarters of those were in subprime.

CDOs allowed the banks to lay off more risk to others, and were created specifically as a complex credit derivative to allow greater lending liquidity. As a result, banks could...

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