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Synthetic CDO that fails in subprime securitization

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This illustrates a partially-funded synthetic CDO typical of the failed structure in the subprime meltdown. "Partially-funded" refers to the fact that only a fraction of the reference portfolio is collateralized (e.g., 7% to 15%); the investors purchase securities only on this funded tranche. "Synthetic" refers to the fact that credit risk is transferred not with a sale of loans to the SPE/SPV, but by the purchase of credit protection with credit default swaps (CDS).

Channel: Education
Uploaded: November 30, 1999 at 12:00 am
Author: bionicturtledotcom

Length: 08:53
Rating: 4.783784
Views: 25882

Tags: Finance  Derivatives  Subprime  

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Video Comments

dajieda0 (November 30, 1999 at 12:00 am)
very very good explanations. thank you!!!
StataFanLearner (November 30, 1999 at 12:00 am)
How can I make a yellow circle around an arrow like you?
StataFanLearner (November 30, 1999 at 12:00 am)
How can I make a yellow circle around an arrow like you?
StataFanLearner (November 30, 1999 at 12:00 am)
How can I make a yellow circle around an arrow like you?
shortloinsirloin (November 30, 1999 at 12:00 am)
Hello David - What software are you using to record your presentations? Very well put together. Thanks in advance
rhunter187 (November 30, 1999 at 12:00 am)
@Macgyver107 You nailed it!!! No one knows how to value these complex financial instruments. So much so, the Fed even chose not to try. They took the bailout money and chose to make equity injections instead of purchasing the toxic assets. So yes, all of the toxic assets still exist on bank balance sheets and nothing will change until these schemes are outlawed.
rhunter187 (November 30, 1999 at 12:00 am)
The originating banks should never need to purchase credit protection if they performed the proper due diligence on the reference portfolios in the first place. This is a complete scam and until securitizations and derivatives are outlawed, we the public will always be 'on the hook'. BTW, all of these toxic assets still exist on bank B/S's. So what's changed? Answer...NOTHING.
covingtonium (November 30, 1999 at 12:00 am)
salman khan should do these so they are even better understood
chekoutdude (November 30, 1999 at 12:00 am)
Hey David, its really helpin me gain knowledge abt des concepts. Great goin.. Kudos to u!!!!
jdkhanlian (November 30, 1999 at 12:00 am)
I never heard of the basis risk part of the SCDO story before. Why didn't they just structure that supersenior CDS as a single tranche SCDO if they wanted to completely remove the risk? I would just think that the crisis arrives just from the fact that the counterparty in the supersenior tranche CDS was also a bank and they didn't post collateral like the subordinate tranche investors did, making the whole SCDO partially funded.


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