The legal suit initiated by SEC against Goldman Sachs exposing the latter’s fraudulent activities have opened a can of works. One by one banks are being charged with legal suits across America fro fraud in CDOs.

CDO stands for Collateralized Debt Obligation. It is a type of security whose investment has been graded that is backed by a cluster of bonds as well as loans and other assets. CDO is not about any one kind of debt but are more often than not related to non-mortgage loan as well as bonds. In structure it is akin to CMO or Collateralized Mortgage Obligation or CBO meaning Collateralized Bond Obligation. But CDOs involve various kinds or risks on various debts. These are called tranches and slices. Each slice matures at a different time and has a different risk connected with it; the more the risk the greater the profits from the CDOs.

Merrill Lynch together with UBS as well as Deutsche was some of the largest entities that arranged CDOs and these firms are now the targets of federal regulators. Investigations are being initiated and it seems these will not be relaxed in near future.
One experienced insider of Wall Street commented without disclosing his name as he was afraid about his job, “A lot of this stuff would have seemed like fairly standard operating procedure at the time these deals were being sold. But take it against the backdrop of the meltdown … and add in some incendiary e-mails … it’s a problem that is not going away.”
The mega investment banks roped in nearly $1 billion from fees for making these CDOs and selling them according to Wall Street Journal.

A report from Credit Suisse says the biggest CDO underwriters during the hey days of the boom (2005 to 2008) indicate that five significant players were Merrill Lynch, UBS, JPMorgan, Citi and Morgan Stanley. Together they created deals worth over $50 billion.

At the moment over six arbitration cases are hanging against Wall Street corporations. Investors, pension funds together with hedge funds are asking for damages for these CDO investments that have turned sour.

UBS spokesperson declined to make any comments. The cases have been placed before Financial Industry Regulatory Authority.

Goldman is furious and vigorous in its defense. The New York branch of Klaymand & Toskes said, “The Wall Street banks like to say that they sold these to sophisticated investors who knew what they were getting into. No matter how sophisticated someone is, if they don’t have the full story, if things are misrepresented, it’s fraud.”

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