CDO Collateral Management Agreement


Cornerstone Research analyzed an investor bank’s claims of improper practices by the CDO collateral manager, which allegedly led to investor losses during the financial crisis.

Cornerstone Research was retained by the defendant to assess a bank’s claims regarding its investment in synthetic bespoke collateralized debt obligations (CDOs).

Cornerstone Research’s analysis showed that the CDO collateral manager’s actions were consistent with the collateral management agreement and did not cause the investor’s losses.

Synthetic bespoke CDOs are typically single-tranche CDOs that allow investors to customize their credit risk exposure. These CDOs provide flexibility to both investors and collateral managers by allowing them to make adjustments to the underlying portfolio based on their performance and changes in expected risk.

Our analyses responded to four key allegations by the bank regarding the CDO collateral manager’s actions:

Allegation: Made improper substitutions of reference names in the CDO portfolio.
Analysis: Assessed the process followed for executing reference name substitutions.

Allegation: Executed substitution trades at non-market spread levels.
Analysis: Examined specific single-name credit default swap (CDS) substitution trades and trade levels versus market data.

Allegation: Made improper adjustments to CDO tranche subordination levels.
Analysis: Evaluated the CDO calculation agent’s analyses for CDO tranche subordination adjustments.

Allegation: Violated investment management guidelines with respect to permitted concentrations by industry, geography, and credit ratings.
Analysis: Assessed compliance with investment management guidelines for portfolio concentrations and execution of CDS substitution trades.

The analyses showed that the CDO collateral manager’s actions were proper.