Norma, the star of Bellini's opera of the same name, winds up swimming with the fishes. Norma Desmond of Sunset Strip fame winds up in the loony bin. And Norma CDO I Ltd. is the cover girl for an inside look by the Wall Street Journal at a devastated CDO.
Norma is a CDO that started out with rating agencies assigning a AAA rating to 75% of its securities in March of this year. By November the bloom was off the rose and Norma was thrown on the junk pile.
Norma started life being 'worth' $1.5 billion. However, only a small part of Norma was real, i.e., actual securities that you could touch and feel. Most of it was made up of derivatives that acted as insurance on BBB-rated mortgage securities. These derivatives (in this case called credit-default swaps) 'insured' BBB-rated subprime bonds, but the actual bonds were worth only about a third of what they were valued at in the CDO. So that, for example, $1500 in Norma represented only $500 in real assets. Furthermore, some of the pieces of Norma were themselves slices of other CDOs.
What were they smoking?
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