The Credit Defaults of CDOs: An Investigation of Securitization in Offshore Financial Centers

Collateralized debt obligations (CDOs) have been subject to much scrutiny with the financial crisis. In fact, while other U.S. asset-backed securities are typically issued domestically, a majority of CDOs are issued in offshore financial centers such as the Cayman Islands, Ireland and Jersey rather than in the United States. This paper investigates the legal, regulatory and economic implications of issuing CDOs offshore, and whether offshore issuance of CDOs had an impact on the packaging of the underlying securities and CDO credit defaults. Using a dataset of 517 CDOs, three main findings were made. First, the country of issuance significantly explains the losses in the CDO collateral. Second, lack of reporting requirements for offshore-issued CDOs played a role in CDO credit defaults. Third, there was no evidence that the fact that offshore vehicles are bankruptcy-remote played a role in credit rating inflation and in explaining the proliferation of collateral defaults offshore.