Arturo Cifuentes, managing director and head of CDO research at Wachovia Securities, used his doctorate in applied mechanics and degree in civil engineering from the California Institute of Technology to draw an analogy between collateralized debt obligations and earthquake-resistant buildings and concluded that CDOs should be more shock-proof.
Earthquake modelers concentrate on the effects of shocks and can now create buildings that have withstood multiple tremors and CDO structurers can learn from this, he noted. He drew out his analogy with earthquakes to compare a CDO to a five-story building, in which the penthouse could be vulnerable to tremors on the lower floors.
He also showed California can suffer a serious earthquake resulting in few deaths, whereas in a less 'well structured' region more buildings would fall down and there would be fatalities.
He suggested that investors should be concentrating on investing in CDOs that can withstand shocks in the credit markets, rather than looking for deals in which they forecast that there won't be any shocks. This is "not rocket science," he concluded.
