Insiderman

Why Banks Write Down but Don't Sell Subprime Loans

Wow. That was easy. The only problem is that with a CDO you don't necessarily know what assets are in it. Recall that the CDO may be built using MBS, ABS and just about anything else the originator throws in to enhance credit quality.

Therefore, you don't know what the credits are that are in the CDO. Since CDSs are built to offset risk of CDOs, you don't really know how the CDSs should be priced.

Now, think about the logic of your spreadsheet. The discount rate for each cash flow stream should be adjusted for risk.

Makes it a little more challenging, and that ain't the half of it.