Having a single number like the correlation coefficient to estimate risk greatly simplified the problem of determining risk and led to an enormous growth in CDOs--and not only CDOs, but bundles of them known as
CDO squared or CDO2 or even higher powers.
"Complex products, such as
CDO squared, have such a remote link from the asset that you can't tell when it is defaulting.
"The really complex products like
CDO squared, which has such a remote link from the asset that you can't tell when it is defaulting, can't happen in Islamic finance because debt cannot qualify as an asset," said Dubai-based law firm Clifford Chance head of capital markets Debashis Dey.
"The
CDO squared bonds are made up of middle or mezzanine tranches of the CDO asset-backed securities and are also sold in tranches," Dinallo said.