What could go wrong?
CDOs are coming back. Collateralized debt obligations, the financial instrument that almost led to the downfall of the global financial system in 2007 and 2008, are being revived by a number of hedge funds including StoneCastle Financial and EJF Capital.
In reality, CDOs are just a fancy name for a financing instrument that raises capital and sometimes offloads risks. Mortgage-based CDOs and their derivatives led to 100s of billions in losses around the world during the financial crisis. These new CDOs are another bank financing instrument not based specifically on mortgages.
StoneCastle Financial's new CDOs are backed by subordinated debt issued by around 35 community banks all around the country, and some of the financial institutions are...
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