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).
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. Allegation: Executed substitution trades at non-market spread levels. Allegation: Made improper adjustments to CDO tranche subordination levels. Allegation: Violated investment management guidelines with respect to permitted concentrations by industry, geography, and credit ratings. The analyses showed that the CDO collateral manager’s actions were proper. |