FRM: Synthetic collateralized debt obligation (synthetic CDO)
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- čas přidán 18. 03. 2008
- The key difference between a cash and synthetic CDO is: instead of selling the reference portfolio (loans), the originator (bank) purchases credit protection with credit default swaps (CDS).
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He goes into more detail than when Selena Gomez described it in THE BIG SHORT.
David, how come the bank keeps the residual (equity) tranche. Doesn't that mean having your cake and eating it too, in the sense that, they stand to gain the most from the payoffs accruing from the assets, yet they're also protected via the CDS that if they go bust they'll be covered... how is this conflict of interest tolerated? any thoughts on that? Thanks
The high quality asset part is true, it's not the weak link. I don't disagree with your conclusion, but in order to identify good versus bad securitization (which after all is generally useful), we've got to first understand it. David
Ngopalakrishna, if the bank is exposed to the riskiest piece, it acts as a measure to ensure that the bank (originator) doesn't fill the asset pool with assets that are like
Excellent explanation ! Thank you sir .
So synthetic CDOs expose investors to less risk than normal CDOs?
Sorry, but it is not clear why the bank will retain the riskiest piece of the whole tranches - the equity/residual tranche!! Could you kindly elaborate pls? thank you!
Few doubts:-
1.What is the source of P&I payments to investors? Will CDS premiums paid by originators and returns from high quality assets be enough to compensate the investors? CDS premiums are small compared to the money that has to be given to the investors and also return from risk free assets will be less than what they have to give to subordinate notes and residual.
2.So does the payment on loans stay with the originator and he just transfers the credit risk? He can simply buy a CDS for it.Why to get into trouble of getting into this synthetic CDO business?
3.Where does trustee get money to buy risk free high quality asset and what are the incentives for it?
This video was not as clear as the balance sheet CDO one. Anyone with clarity kindly explain. Thanks
Such deep content
Thanks so much for this. I have gained a good knowledge of what all the NEWS is about. This reminds me of how craps is played in Vegas. Regarding your illustration - I found it very easy to follow. It reminds me of a biochemical enzyme cascade (Those are REALLY cool!!!) :)
Damn. You said this before Big Short came out
Hey David, I think I get the answer in some reading. It says "balance sheet CDOs are more likely to retain the equity tranche to mitigate the adverse selection problem for skimming the higher quality assets from the collateral pool." Thoughts?
Hi David, If you are long a synthetic CDO does that mean that you receive the premiums from the Credit Default Swaps and essentially go long the credit?
Yes. If you are long on synthetic CDOs, then you will get money if the referenced securities perform.
That money for you comes as
a) interest payments (for "funded" long investors who paid in cash to buy the synthetic CDOs) and
b) premium payments (for "unfunded" long investors who keep receiving premiums till the synthetic CDO performs. But they would have to pay if the referenced securities deteriorated beyond a certain point).
So yes, if you are long on a synthetic CDO, you will make money.
If you are "short" investor on a synthetic CDO then you will make money if the referenced securities failed.
synthetic CDOs = more counterparty risk than normal CDOs but can be written/purchased on third parties for notional values
Extremely increased systemic risk especially when coupled with highly leveraged critical agents in scale-free finance networks... increases risk carrying capacity in a stable regime but increases fire sale complexity in an unstable regime
Setting up SPVs should never be allowed for any investment banks.
If the investment is not allowed by law to engage in certain activities, the setting up of SPVs merely is a tactic to bypass/avert the law.
Aaah, that makes it clear now.. Thank you for replying..
soon we shall say cd-oh dear...
14 years later
In this structure, the assets are not sold to the trustee thereby not removing them from the orignator's balance sheet. IN that case, how is this structure termed as Balance-sheet Synthetic CDO?
Maybe the balance sheet, the cdo is on is the originators. And that's why it has balance sheet in the name.
SPVs are non balance sheet items
instructions unclear, crashed the market
Why does the senior tranche receive anything at all? They have not invested anything. Why should they get any return?
Mehfooz Husein They do invest their money, they get a lower interest rate because they get paid first.
Thanks for the explanation! It really helped out!
I guess it's quite randomly asking but does anyone know of a good site to stream new series online?
@Lorenzo Shawn I dunno I watch on flixportal. You can find it by googling:P -landon
@Landon Misael thank you, I went there and it seems like they got a lot of movies there :D Appreciate it !!
@Lorenzo Shawn No problem xD
So synthetic CDOs are basically securitized insurance contracts where cash flows from premiums take the place of cash flows from principal/interest from regular CDOs?
Yep, they're CDOs made up from the insurance of those same CDOs. Put simply, betting on a bet. Fucking crazy. The market for insuring bonds was twenty times bigger than the bond market itself prior to the economic collapse of 2008.
@@johnknox6023 I sorta see the logic behind them from the originator's viewpoint. The people buying synthetic CDOs are basically taking the place of regular insurance providers. I think that this could mean more competition and lower premiums for originators. On its own it's actually a fairly good idea, I just think that degenerates took it a bit too far.
I feel like some tech bro is eventually gonna apply the same principal and claim to "decentralize insurance" and do fairly well before it all blows up in their face & they go to jail for fraud.
@@conormacneill8284 Absolutely it was a good idea if everyone played by the rules, but they didn't. Largely the rating agencies in my opinion, who were literally selling AAA ratings on the CDOs to banks. (A bit unrelated to the synthetics, but same principle that underhanded stuff was going on)
So yeah, a few more FTX Bankmans go to jail and we will see crypto be as heavily regulated as the rest of the finance industry.
Sorry, but it is not clear why the bank will retain the riskiest piece of the whole tranches - the equity/residual tranche!!
Hi. Can I ask, where does AIG fit in in this?
Hana Amin investor ;)
yvan1401 So this means that they sold CDS, and at the same time bought CDOs?
no. the banks sold the CDS, but they are not stupid. so they covered their asses through AIG. The banks were really just a passenger, receiving premiums of around 2.5% from the CDS buyer, but paying only 0.12% to AIG, it was just free money for the banks
Skywalker why was AIG so stupid though? they even start to understand their risk so they stopped selling CDS but did nothing to help their exposure on the previous ones they had out
....likely to default, as they would lose out if this happened
And I know what you're thinking. What the f... is a synthetic cdo?
OTC. No underwriters
people are so sick for money
soon
#THeXDesK
This monstrosity almost ended capitalism