Introducing the latest risky derivative: the C-3PO

Posted by: Peter Coy on October 3, 2007

C3PO.jpg
Anyone rubbernecking the slow-motion disaster in housing has become at least a little familiar with derivatives like CMOs (collateralized mortgage obligations) and CDOs (collateralized debt obligations). Maybe you’ve even heard of an ABN Amro product announced last year, the CPDO, or constant proportion debt obligation—“a breakthrough in synthetic credit investments.”

Now it’s my turn. I’m looking for an investment bank to help me issue a security of my own devising, the C-3PO. This acronym stands for … hmmm, let me see … Constantly Collapsing Collateral, Payment Optional.

Like its droid namesake from Star Wars, my C-3PO will be quite entertaining, although a bit fussy and unreliable. In other words, it will be a lot like other asset-backed innovations concocted during the past decade of financial wizardry.

For investors doing their due diligence on my C-3POs, let me warn that the collateral supporting them consists of the very stupidest subprime mortgages in the very worst markets, including Phoenix, Las Vegas, and Miami (hence the “constantly collapsing collateral” of the name).

Worse yet—

since I'm in full-disclosure mode here--is that homeowners are free to suspend or cancel either principal or interest payments or both at any time for almost any reason (hence "payment optional"). Acceptable excuses for non-payment include "the dog ate my payment slip," "nobody ever told me I had to pay the money back," and "do you know how much a Harley costs these days?"

So, Bear Stearns, how about it? Merrill? JPMorgan Chase? Deutsche? ABN Amro? Surely my idea will appeal to inventive investment bankers at your firms who suddenly have a lot of time on their hands but haven't yet been fired.

Then again, it just might be that I'm too late with this idea. Come to think of it, wildly risky mortgage-backed securities do feel like an idea from a long time ago in a galaxy far, far away.

 

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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