Collateralized Debt Obligation: The Lehman Brothers Case Study

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Letter of Transmittal
3/82 Wellington Rd
Clayton, Vic 3168
September 6, 2012

Dr. Mohammad Hoque
Department of Accounting and Finance
Monash University
PO Box 197
Caulfield East, Vic. 3145

Dear Mr. Mohammad Hoque:

Enclosed is a copy of “Group Assignment” about the understanding of CDOs. This report is aim to critically examined how CDOs may help banks to avoid liquidity risk and create more assets, and also problems in term of the purpose of CDOs, the role of three mechanisms in CDOs and problems faced in CDOs. After that, it discusses how CDOs created problem for Lehman Brothers by analysis subprime mortgage crisis. Finally, this report provides some recommendations for making the CDOs as effective liquidity risk management mechanism for banks or financial institutions.

If you have any questions and/or comments regarding the interpretation of this report, please feel free to contract our group at the addresses above.

I hope you find this report satisfactory.

Sincerely yours,
Bingyu Zhao; Shanyu Lin; Yongshi He

Enclosure: Group Assignment

Executive Summary
This report provides an analysis and evaluation of CDOs and with the example of how CDOs is contributed in the bankruptcy of Lehman Brothers, and then gives some recommendations for making the CDOs as effective liquidity risk management mechanism for banks or financial institutions. Methods of analysis include share price value analyses of Lehman Brothers and as well as historical data of structured products, and CDOs investment in global. Other evaluations are coming from the academic journals, and government reports. Results of critically evaluation of CDOs shows that CDOs are major causes of global financial crisis, it can help banks to avoid liquidity risk and create more assets, but also can make problems, so it is important for banks and financial institutions to develop further of CDOs as an effective liquidity risk management mechanism.

The report finds the prospects of the current securities market are not positive. The major areas of weakness require further development of CDOs. Recommendations discussed include: 1) Improving the lending standards of housing mortgage. 2) Helping investors to improve the understanding of CDOs. 3) Improving supervision of information transparency.The report also investigates the fact that the analysis conducted has limitations. Some of the limitations include: not enough information is provided or enough detail of the CDOs value of Lehman Brothers.

Table of Contents
Letter of Transmittal1
Executive Summary3
List of Figures4
Main Body:6
The Purpose of CDOs6
The Role of Three Mechanisms in CDOs7
Problems Faced in CDOs8
Lehman Brothers10
Subprime Mortgage Crisis11
Internal Problems13

List of Figures
Figure 3.1.1 Lehman Brothers Share Price

Figure 3.2.1 Global CDO Issuances by Quarter

Figure 3.2.2 Number of Structured Products Issued by Lehman Brothers (January 2006 to September 2008)

Figure 3.2.3 Dollar Value of Structured Products Issued by Lehman Brothers (2006-2008)

In 2007, a terrible financial crisis start from American to the whole world, millions of banks, financial institutions and corporations were bankruptcy. The economy of American is so robust until that time. Real estate is one of the most severe losses industries. And the CDOs – Collateralized Debt Obligations is the reason why real estate went down in this financial crisis. CDOs as a financial instrument effectively help the banks or financial institutions to avoid liquidity risk. Also, it creates more assets for investors, banks, financial institutions, even everyone. But later, the CDOs start to create problems and finally lead to the bubble economy in America.

The aim of this paper is to give three main points about CDOs. Firstly, this paper will...
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