Warehousing

What Is Warehousing?

Warehousing is an intermediate step in a collateralized debt obligation (CDO) transaction that includes purchasing loans or bonds that will act as collateral in a mulled over CDO transaction. The warehousing period regularly endures three months, and it reaches a conclusion after closing of the transaction when they are eventually securitized and sold as part of the CDO.

Grasping Warehousing

A CDO is a structured financial product that pools together cash stream generating assets and repackages this asset pool into discrete tranches that can be sold to investors. The pooled assets, including mortgages, bond, and loans, are debt obligations that act as collateral — subsequently the name collateralized debt obligation. The tranches of a CDO change substantially with their risk profile. Senior tranches are somewhat more secure in light of the fact that they have priority on the collateral in the event of a default. The senior tranches are rated higher by credit rating agencies yet yield less, while the junior tranches receive lower credit ratings and offer higher yields.

An investment bank does the warehousing of the assets in planning of sending off a CDO into the market. The assets are stored in a warehouse account until the target amount is reached, at which point the assets are moved to the corporation or trust laid out for the CDO. The most common way of warehousing opens the bank to capital risk on the grounds that the assets sit on its books. The bank might possibly hedge this risk.

CDOs Gone Wild!

In 2006 and 2007 Goldman Sachs, Merrill Lynch, Citigroup, UBS and others were actively warehousing subprime loans for CDO bargains that the market appeared to have an unquenchable hunger for — until it didn't. At the point when breaks in the dam began showing up, demand for CDOs eased back, and when the dam burst, holders of CDOs aggregately lost many billions of dollars.

In a definite narrative of events spread out in a subcommittee report of the U.S. Senate, "Money Street and the Financial Crisis: Anatomy of a Financial Collapse," it was reported that Goldman "was obtaining assets for several CDOs without a moment's delay, [and] the CDO Desk generally had a substantial net long position in subprime assets in its CDO warehouse accounts." In mid 2007, the report proceeds, "Goldman executives started to express concern about the risks presented by subprime contract related assets in the CDO warehouse accounts."

How Goldman subsequently took care of these assets on its books and different dealings in CDOs is a point for another discussion, yet do the trick to say the bank ended up being accused of fraud and forced to pay record fines. It joyfully took a taxpayer bailout and paid millions in bonuses to employees.

Features

• This intermediate step before the transaction is settled regularly endures three months, during which time the underwriting bank is subject to the risks implied in holding those assets.
• A collateralized debt obligation (CDO) is a complex structured-finance product that is backed by a pool of loans and other interest-bearing assets.
• Warehousing is the accumulation and custodianship of bonds or loans that will become securitized through a CDO transaction.