ABS, CDOs, and Synthetics



Securitization is a well-established technique developed to finance a collection of assets which by their very nature are non-tradable and therefore non-liquid. The central element of an asset securitization issue is the fact that repayment depends only or primarily on the assets and cash flows pledged as collateral to the issue, and not on the overall financial strengths of the originator (sponsor or parent company). As a rule of thumb, securitization issues backed by mortgages are called MBS, and securitization issues backed by debt obligations are called CDO (see Nomura [2004] and Fitch Ratings [2004]).  Securitization issues backed by consumer-backed products — car loans, consumer loans and credit cards, among others — are called ABS (see Moody’s Investors Service [2002]).