Merrill flunks the ABCs of CDOs

0 Comments | USA TODAY, October, 2007 | by Adam Shell

NEW YORK -- They are hard to value. Hard to sell. And when markets head south, they fetch just pennies on the dollar -- or nothing at all.

They are CDOs, a Wall Street-created investment that, when stress-tested for the first time, failed miserably, causing Merrill Lynch to write down $7.9 billion last quarter.

CDOs, or collateralized debt obligations, are as incomprehensible as the U.S. tax code.

CDOs bundle different kinds of debt -- in this case securities tied to mortgages -- that are sliced up, repackaged and sold as bonds.

Here's the genealogy of CDOs: You borrow $200,000 to buy a home. The lender pools your mortgage with thousands of others and sells them to a firm like Merrill, transferring to investors the risk that you might not...