CDO Bankruptcy? Just the Recipe We Need: More Uncertainty (DealBook)

OCTOBER 14, 2011, 1:43 PM IN DEBT

The Curious C.D.O. Bankruptcy

BY STEPHEN J. LUBBEN

Barbara B. Fernandez for The New York TimesA collateralized debt obligation incorporated in the Cayman Islands, above, is the subject of a Chapter 11 case in Trenton, N.J.

Something odd is going on in New Jersey.

Once readers work through their favorite Jersey wisecrack, let me explain that I’m talking about the Chapter 11 case of Zais Investment Grade Limited VII, pending now in Trenton.

The careful reader will note that the debtor’s name suggests a special purpose vehicle – and indeed the debtor is a C.D.O. squared arranged by Citibank in 2005. That is, the debtor is little more than a pool of other collateralized debt obligations that has issued myriad layers of debt based on the returns of that pool.

So how did a C.D.O. end up in Chapter 11? Aren’t these things supposed to be bankruptcy-proof?

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