CDO’s- The Garbage Dump Of Securitization
When CDO’s were first introduced I thought maybe I just did not understand. You take junk that nobody wants, dump it into a box, mix it all together and out comes AAA paper. Magic. When I was very active in the early stages of developing CMBS, we always knew there was an issue of what to do with the low level paper and how do you securitize loans that did not have any real cash flow. If this could be solved then the volumes and profits would increase substantially. CDO’s to the rescue. As one of my capital markets friends recently commented, the definition of a good banker is one who dreams up ways to get around whatever the latest rules and regs are.
Despite the massive losses suffered by CDOs’ and their sponsors over the past two years, I hear that they may be making a come back. That would be terrible. A CDO is by design, an instrument of assured deception and destruction. If the loan was made to a solid cash flowing asset, and if there was true debt cover in stress scenarios, then the paper would be in a true CMBS pool. The only reason to have a CDO is to have a place to dump the risk and the junk, otherwise there is no need for it.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
