CDO Creative Balance Sheet Risk Management: Value Creation? Harvard Case Solution & Analysis

IMD-1-0261 © 2008
Lu, Abraham Hongze; Buraschi, Andrea

The goal of the case would be to discuss the development of asset-backed securities and collateralized debt obligations (CDO). Securitization really has been a way to eliminate the bank’s balance sheet to shrink, together with economic and regulatory capital. A special purpose vehicle (SPV) which was bankruptcy-remote was formed to get debt securities or bank loans.

The debts were subsequently repackaged, stratified and sold to investors. Faux securitization did not demand an actual sale of assets. A sponsor bank merely transferred the credit exposure by means of a derivative agreement to counterparty as well as the assets were kept on the balance sheet. Learning objectives: What were the dangers inherent in the securitization construction? How much value would be added? What has become the role of these balance sheet risk management strategies to help understand the banking crisis during the 2007-2008 credit crunch.

Subjects: Basel II; CDO; Risk; Banking; Securitization Settings; Credit Crunch: Worldwide ; Banking ; 170,000 employees ; 2005

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