One of Wall Street’s Riskiest Bets Returns

One of Wall Street's Riskiest Bets Returns

BY KATY BURNE

Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.

In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, J.P. Morgan Chase  & Co. and Morgan Stanley  bankers in London are moving to assemble so-called synthetic collateralized debt obligations.

CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.

Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice.

While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments.

During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world.

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