a fairly plain vanilla mortgage-backed facility

Q1170 Chairman: We have heard of CDOs-squared and CDOs-cubed. Lord Aldington, can you explain to me what a CDO-squared or CDO-cubed is?

Lord Aldington (Chairman of Deutsche Bank): I have not come before this Committee as an expert on CDOs.

Q1171 Chairman: But your organisation is involved in collateralised debt obligations?

Lord Aldington: That is true. My organisation is involved in a very broad range of products and I would not claim to be an expert on all of them.

Q1172 Chairman: You cannot tell me what a CDO-squared is? Can anybody tell me what it is?

Mr Palmer: A CDO-squared is a derivative structure designed to give investors exposure to a CDO.

Q1173 Chairman: Mr Corrigan, can you try to explain it to us in simple language?

Mr Corrigan: I think the easiest way to understand what a CDO-squared is to start with what a CDO is. If I were to take the example of mortgage-backed securities, institutions package up a family of individual mortgages into what is a fairly plain vanilla mortgage-backed facility. I think it is entirely fair to say that when those mortgage-backed securities are issued the disclosures associated with the issuance of those instruments are quite wholesome.

Q1174 Chairman: What does "wholesome" mean?

Mr Corrigan: A CDO carves out of a plain vanilla mortgage-backed security certain credit tranches of that security and reformulates them in what is called a structured credit product into a particular class of credit standards affecting those particular mortgages, not the full pool of mortgages. That is called a CDO. When you take a CDO and then roll it into a second CDO that is called a CDO-squared; in other words, it is a CDO made up of other CDOs.

Q1175 Chairman: If you put in another one it is a CDO-cubed?

Mr Corrigan: Thank God, we have not got that far yet.

Q1176 Chairman: At the end of the day it is becoming more complex and opaque, is it not?

Mr Corrigan: It is certainly complex.

Q1177 Chairman: Professor Buiter cannot understand it. If Lord Aldington cannot explain what a CDO-squared is what does that mean for ordinary people?

Mr Corrigan: With all due respect, it is important to recognise, as I am sure you do, that the CDO product, much less CDO-squared, is clearly one that is aimed at sophisticated institutional investors. It is not aimed at retailer investors and in my judgment should not be.

Q1178 Chairman: But you have insurance companies and others putting their money into these things and the pensions and insurance of ordinary people are involved in them, so at the end of the day the ordinary man can lose?

Mr Corrigan: That is true.

http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/7120403.htm