CDOs and other derivative instruments are often huge collections of securities broken into tranches, some of which are much more risky than others. Institutional investors are now trying to pry the more valuable pieces of these layers from the toxic ones, which is leading to vicious fighting among the parties and, in some cases, lawsuits.
According to the FT "Some investors in the differently rated and ranked slices of CDOs – known as tranches – have taken advantage of the -little-noticed terms in the -structuring of such instruments to seize control of the assets and cut off payments to other debt-holders."
The battles over pieces of the $450 billion pool of debt is likely to get worse as banks, brokerages, and venture capital funds try to shore up their finances. In some cases, if CDOs begin to fail, banks, as senior debt holders, can accelerate pay-outs of interest. This, in turn, can steal the value of the less desirable assets within the paper.
Tough going, ugly fights.
Douglas A. McIntyre