When bright sparks at ABN Amro, the Dutch bank, recently invented an innovative debt product, it triggered a wave of Star Wars jokes. For the eggheads christened their brainchild – which has taken credit markets by storm this winter – a CPDO.
It stands for constant proportion debt obligation but, with a name like that, some bankers quip, it might be a new friend for R2D2 and C3PO, the robots from the films.
Welcome to the world of complex finance, a sector now so rich in abbreviations it leaves even seasoned financiers, as well as investors, scratching their heads.
A couple of decades ago, when new financial products hit the markets, banks gave them names. A host of new words crept into the investment bible over the years, such as “options”, “swaps” or “puts”.
These days, it seems, bankers cannot be bothered to name their creations. Instead, the trend is to wrap financial products in sets of initials almost as unwieldy as the products themselves. Thus the credit markets are full of CDOs (collateralised debt obligations), ABSs (asset backed securities), CDSs (credit default swaps), LCDSs (loan CDSs) and even the ABCDS (a CDS of an ABS).
Then there are CLOs (collateralised loan obligations), ECOs (equity collateralised obligations) and the recently arrived CDO2 and CDO3 (CDOs of CDOs of CDOs).
A longer-standing abbreviation is the CMBS (commercial mortgage backed securities) or its cousin the RMBS (residential mortgage backed securities), not to mention Reits (for real estate investment trusts).
This month Bank of America produced the Aldo (adjustable liabilities debt obligation), which is designed to compete with the CPDO. Bankers, however, sometimes call these “reverse CPPIs” (standing for constant proportion portfolio insurances) just to be more confusing still.
Some investors blame the “alphabet soup” on the fact that many bankers in complex finance have been trained in science and mathematics. Others suspect that bankers are just making life complicated to exude an aura of mystery – and justify fat fees.
Another factor driving the trend is broader accelerationof the global financial innovation cycle. Low interest rates have left investors scrambling to find new ways to earn returns – and banks are responding by inventing products at such a furious pace, they barely have time to think up names.
“There is greater investor demand for products using derivatives – that drives the alphabet soup,” says Bob Pickel, head of the International Swaps and Derivatives Association (best known as the ISDA).
The soup is expected to thicken in 2007. Satyajit Das, a former derivatives trader who is now a consultant, says he is tempted to produce a spoof product called an unspecified fund obligation – or UFO.
The writer is the FT’s capital markets editor