By R. Russell Hurst, Banc One Capital Markets

The answer may be shocking, but many investors have had healthy overall returns on seemingly large holdings of CDOs. On a strictly intuitive level, a 10% to 14% equity return on a stressed CDO, originally projected to earn 19% to 25%, compares very favorably to the performance of the stock market over the past two years. Some investors have been able to avoid the CDOs that severely deteriorated over the past five years, and have achieved positive returns at each of the Senior, Mezzanine and Subordinated levels. The question becomes, "How did they pick the winners and avoid the losers?" The answer can be found by looking more closely at the credit performance of the CDO market compared to the corporate market and the selection process used by most of these investors.

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