The booming popularity in recent years of synthetic collateralised debt obligations – pools of credit instruments that are repackaged into slices with different risk profiles – has given some banks a problem.
They have found a ready market among investors for the mezzanine, or moderate risk, tranches of synthetic CDOs, and so-called “leveraged super-senior” deals have also found buyers at the safest end. But the equity, or first-loss, risk at the lowest end of the credit spectrum has proved harder to shift, which has left some issuing banks with large unwanted trading positions.
