Customer Reviews

Structured Finance and Collateralized Debt Obligations: New Developments in Cash and Synthetic Securitization (Wiley Finance)

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I echo the praises of this book sung by previous reviewers. But I can also say in all sincerity that this is the most fun book I can ever recall reading about finance.

The book isn't an overview of the current credit crisis per se, but a detailed look at some of the building blocks that came tumbling down (as well as some that might collapse in the future, such as total-rate-of-return (TRO) swaps). It's addressed to a professional audience, so if you're shy about reading books with some equations you might not enjoy it so much. Most of these are pretty simple, though, and none involve calculus.

Still, I'd recommend that you not be put off by the quantitative bits and professional terminology. To a greater extent than most other finance books, Tavakoli uses diagrams to explain the deal structures. The pictures aren't always understandable separately from the text, but they are generally very lucid and valuable. Most importantly, interspersed with the material for practitioners are extended narrative, historical and critical passages, which will give you an insider's insights into the role human nature plays in quantitative finance. Although she's a financial professional herself, Tavakoli isn't afraid to call 'em how she sees 'em, often with a bit of appropriate cynicism, e.g. "Hedge funds have made massive leveraged credit bets, knowing that their upside is billions in fees and their downside is millions in fees" @ 430. I even laughed out loud in a couple of places, which was a personal first for a book of this genre.

Occasionally Tavakoli uses terminology that isn't explained until later (such as "value at risk" (VaR), which is mentioned @ 87 but not explained until the next chapter, @ 94ff); unfortunately, the index is an erratic aid in this situation (e.g., VaR's first entry in the index is for page 97). But these are very minor quibbles, and shouldn't discourage you from reading this terrific book.

I'm told Ms. Tavakoli is doing a booming business these days helping plaintiffs with synthetic CDO lawsuits. If so, there may be some justice in the world. She is a rare creature of finance, hard-working genius grounded in ethics that should define the profession (i.e., due diligence on behalf of clients. What a concepts). As others have rightly noted, the book contains something you can't find *anywhere* else: myriad details of real-world transactions and actual practices as they vary from theory. In short, the straight scoop from the inside.

Briefly, my only nit, which is unrelated to Ms. Tavakolio's genius and generosity: the organization and editing of the book are, at times, a bit too much brisk swerving narrative and not enough pedagogy (e.g., there isn't quite enough help understanding the synthetic CDO and equity CDO case studies, I doubt many readers will suffer the details in the way they are presented). She knows too much stuff. On some of the transactions, I struggled to keep up. A full reading of the book would have taken less time if they had polished the final, tightened the organization, and paused to explain in a few areas. She is five stars and then some, the book is four stars for degree of difficulty.

The first half of book is generally an introduction to credit derivatives, the building blocks that constitute the more sophisticated CDO technologies; e.g., CDS, CLN, role of SPE/SPV, early CDO technology, credit enhancement (very important!), CDOs backed by RMBS.

The best part of the book is the second half. Selected highlights:

* Great stuff on CDO tranches; e.g., senior tranches tend to bear the systemic risk while junior (1st to default) tranches bear the name or idiosyncratic risk
* The best part of the book, for me, is the detailed compare/contrast between a synthetic arb CDO and cash arb CDO; e.g., cash CDO has a market risk hedge counterparty (interest rate and currency), synthetic CDO does not; synthetic CDO has a super senior tranche;
* Several brilliant anecdotes related to model risk in practice (mis-applications of models). If she doesn't prove to you that "approximately right" is a better goal than "precisely wrong," nothing will budge you.
* Helpful due diligence questions for an investor to ask of CDO manager; e.g., have you been deposed in last 5 years?
* Stinging take down of Basel regulatory framework ("Basel II is part of a series of failures by various financial regulators to capture the most fundamental risk in the banking system: lending money to someone who may not pay you back"..."as securitizations began to come back on the balance sheets in 2007, it was clear that BIS had no idea of the problems that leverage, synthetics, and securitizations could pose")
* Best expose of the super senior tranche. It's unbelievable and stranger than fiction.
* Funny digs at the roles of regulators, economists and lawyers. You gotta love her. It occurs to me she may be fearless, in part, because she makes a habit of doing the right thing.
* Dense, important material about the nuances of hedging ineffectiveness; e.g., single-tranche CDO
* What does she conclude in the chapter "The Credit Crunch and CDOs?" There is no other way to say this, it's a broadside against the credit rating agencies. On several levels, by the way (motives, application of statistics). She says, "My own view is that for structured products, the NRSRO designation should be revoked." She makes the point that "savvy investors ignore ratings" (i.e., knowing they are wrong).

If you are going to buy only one book on this topic, this is the one to buy.

First, it covers all the critical aspects of structured products: quantitative, qualitative, legal, etc.

Second, it provides an insightful analysis that makes it easy to grasp the issues behind the current financial crisis [What, Why & Who]

Third, it is written by somebody who understands the topics and has done the stuff (NOT by somebody who talked to somebody who thinks is an expert, but cannot know for sure because he(or she) does not really know the topic well).

Fourth, it is written in a style that is fresh and engaging, but precise: neither the pedantic language of some academics nor the infantilizing language of some amateurish journalists.

Chapter 17 (The Credit Crunch and CDOs) is a MUST for anyone involved in the structured products market.

ARTURO CIFUENTES

This book is undeniably the best covering securitization structures and in particular the asset-backed (home equity) CDO's and credit-derivative-based "synthetic" securitizations that lay at the heart of the current financial crisis. Tavakoli is a long-time derivatives person and is therefore better at explaining the mechanics and manipulations of synthetics than anyone I've read.

Tavakoli is known for her dubious attitude toward some of the uses to which securitization has been put, and now she has been proven to be right. The book flows seemlessly into the volatile present, covering many of the innovations which helped accelerate the downfall of the financial system as we know it. Tavakoli is a wise guide.

In summary, I would expect this book to be of interest both to the average person who likes to read about business and economics, and also to students of finance, especially those who want to better understand the Panic of 2008.

This book provides an insider view into the opaque world of structured finance and collateralized debt obligations. With its clear explanations of numerous structured-finance innovations, I expect this book to become the "Rosetta Stone" for deciphering these markets.

In addition, the book includes a lot of nuggets of wisdom on applying a value-investor discipline to structured finance. This is something that I hadn't expected since the complexity of structured-finance instruments would give one the impression that this field is (and was) only a realm for rocket scientists. For example, in Chapter 5, Janet Tavakoli describes "The Leverage Paradox" whereby levering up equity (or even commodity) positions that are deeply distressed can make sense as a systematic strategy since the dramatic returns for correct bets can compensate for the inevitable downturns from such a strategy. But when leverage is applied to non-distressed debt securities, as was the fashion during the credit boom, disastrous results can (and did) happen with any air-pocket in the market, whether it is because of isolated cases of fraud or temporarily difficult liquidity conditions.

Janet Tavakoli in her book Structured Finance & Collateralized Debt Obligations takes an extraordinary complex subject and makes it understandable. This subject matter can be headache inducing, but Ms. Tavakoli has such a good understanding of the subject that her writing is as interesting as it is comprehensive.

The last paragraph of this book encapsulates the reason every sophisticated investor needs to fully understand the world of Structured Finance:

"The future of finance is unclear. It is not as if finance needs more regulation. Bloated and ineffective global regulatory bodies abound. What is needed is effective regulation. Until that occurs, investors will have to fend for themselves and practice the fundamentals of prudent lending and investing."

Janet Tavakoli has done a great job with her latest edition of Structured Finance and CDOs. This is a must read for anyone trying to understand these markets and the human factor behind the deals that have turn sour in the recent events of the US housing and global credit crises. Great timing for a revised edition!

It is a known fact that the structured finance world has changed dramatically after the recent events but it won't cease to exist. As Ms. Tavakoli puts it, structured finance allows for the creation of synthetic deals than can and will continue to be used for valid business purposes but can also be used, and will continue to be used, as instruments to defraud investors in many instances, hence the call for regulatory bodies that can keep up with the manufacturing of complex financial structures and the way the market players interact driven by greed.

The book doesn't give the reader the answer to the current crisis but it definitely serves as a tool to understand it and craft an educated guess of how and why things happened they way they did. If you are new to the field let Ms. Tavakoli, a real and experienced practitioner, walk you through the inner workings of the industry; you won't regret it.

A must read for every Securitizations professional. Brilliantly captures the essence of the crisis of 2008. Wish every CEO/CFO were as clear-thinking and well-grounded in Ethics as Ms. Tavakoli is.

Much more easy than any other book on that topic! This excellent book written by Janet Tavakoli on structured finance products. It helps to understand through simple examples how this works. Beside this, the author provide good advice on financial markets. A must-buy

Janet Tavakoli has done it again and provided a concise and understood work on the complex field of structured financial products. In today's world market downturn, Ms. Tavakoli continues to analyze in common sense form the credit crisis and the need for effective, though late to the game, regulation.