New York (HedgeCo.net) – During the financial crisis in 2008, most of the world learned about collateralized debt obligations or CDOs for the first time. Unfortunately, CDOs were not seen in a positive light as they were at the root of the problem in 2008 and thus the term CDO is eschewed in the financial world.

However, Joshua Siegel and his firm StoneCastle Financial are attempting to bring back CDOs, but in a much different form. According to a report from Bloomberg, rather than using mortgages and derivatives, StoneCastle’s offering is backed by the subordinated debt of community banks. Because subordinated debt is last in line during bankruptcy proceedings, issuers usually have to pay a higher rate in order to attract buyers.

Citigroup just acquired StoneCastle earlier this month and they are calling the new offering collateralized loan obligations and the StoneCastle Community Funding CLO boasts a yield of 5.75%.

Siegel is touting the new CDO as better due to what banks learned during the credit crisis. Regardless of whether or not they are better, given the reputation of CDOs, it could be a tough product to sell to the general public.

Institutional investors might be willing to run their own due diligence and participate.

Rick Pendergraft
Research Analyst
HedgeCoVest