CDO Debt Could Pose Renewed Danger For Banks

Investment managers, including GSC Group, which buy bonds in arcane securities known as asset-backed collateralized debt obligations, are looking to force Wall Street banks to take back onto their balance sheets a big chunk of the $380 billion in mortgage loans used to back these CDOs.

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Due to the language embedded in many CDO deals, bondholders can return the securities to the so-called depositor or bank at 100 percent of their original investment if they can prove that there was fraud involved in originating the mortgage.

Investors are growing emboldened because fraud claims are becoming more prevalent over these loans as it's discovered that borrowers lied about their incomes or that lenders turned a blind eye.