The number of traditional cash CDO defaults has been widely publicized and, obviously, received widespread damage assessments. But what of credit events that factored into synthetic CDO downgrades over the last two years? Calculating and modeling for events in the world of nontangible assets is an adjustment akin to moving from the roulette wheel to the baccarat tables.
The effects of credit events on a synthetic CDO are layered. Synthetic CDOs harness the credit derivatives market by utilizing credit default swaps tied to reference entities. Although those reference entities are public companies, detailed information on credit events available to the public is next to none. Sources state that synthetic CDO investors track and record their own independent information.