Collateralized debt obligation (Balance Sheet CDO)

[dajieda0]

my lecturer did really did a good job on this topic...

[dajieda0]

why senior tranches like low correlation assets while subordinate tranches prefer high correlation?

[donttrythis55]

why does the bank originator keep equity on it's balance sheet? I understand the different tranches but what do you mean by equity?  When you have excess spread does that mean the purchase price less principal and interest? Thanks

[PionnerDU]

Hi there It would be so grat and helpfull to add the chapter to the title since you are using John Hull... many student are having hard time understanding some of these chapter so it will be great if you have that.

Thank You so much your video help me alot but sometimes it is so hard to find some of the stuff..that relate to the chapter.

I will be very soon one of your student

[austinacmes]

Hi David, great video. I have a question while watching this video. hope you don't mind answering. Why would a low default correlation among the originator's assets will hurt the subordinated tranches?

[dayzman]

@austinacmes I wonder about this too. Anyone?

[austinacmes]

@dayzman It is because subordinated tranches are the first ones to absorb the losses of the portfolio. Low default correlation among the assets means over a period of time, one or two names default won't pull the whole portfolio under water. Therefore, the sub tranches will always be the first ones to absorb these losses. The senior tranche, however, with a low default correlation among the assets, can use these sub tranches as cushions. The reverse is true when the default correlation is high.

[dajieda0]

@austinacmes you are right. Thanks.

[ribal81]

"Low default correlation between the assets" is the concept that brought the hole CDS market down. It proved that it was a misconception, at best.

[anolmec]

Considering a residential mortgages. After securitization, who is the holder in due course??? Not the bank. They sold it to the SPE. Not the SPE. They didnt put up money to purchase the original mortgage. Not the investors. They are holding a CDO,not a mortgage.Your video raises the question "does the original mortgage still exist after it has been securitized??? My guess is NO IT DOES NOT AS THE OBLIGATION HAS BEEN PAID BY ANOTHER, NAMELY THE INVESTOR, WHO IS HOLDING A CDO, NOT A MORTGAGE.

[xingaporegirl]

Thanks for posting these! Your videos are amazing!!! :)

[davidluk8]

Thanks for the video.

[therealgeeza]

is one way to get out of the current mess a period of rapid currency devaluation? (thereby deflating the real value of loans?) and what do you think is the outlook for US inflation?

thanks

[oksanaUfim]

just to say thank you for the vids

[FinancialEngineer]

May I ask how did you learn all of this?

[bionicturtledotcom]

I teach/learn FRM (risk) at my site, bionicturtle. I was a consultant for many years, but i do a lot of self study via CFA & FRM.

[bionicturtledotcom]

Hi KLguy133, absolutely many of the investors were banks holding/retaining the "high rated" tranches. In dollar terms, I'd bet more has (so far) been lost on drops in value in these tranches than defaults at the lower level.

[fallcolors2008]

You are the best!!

[bionicturtledotcom]

Thanks David, I really appreciate that. I haven't seen the lender-of-last-resort data and am a little unclear how that gets them stuck. But to your latter, clearly much of the absolute losses are due to banks retaining the (unfunded) super senior paper (the highest rated tranches). Then two problems: 1. just valuation plummet, way more sensitive to lower tranches than modeled, and 2. the CDS HEDGES on these "safe" securities did not work (basis risk big time). Thanks! Dave

[KLguy133]

Dave ,

Are you saying that the investors could also be banks and thus suffered the losses on the high end paper as you said ?

Looks to that the originator banks had an inkling that a lot of sub primes would default and tried to cash in on it. Otherwise they could have just hedged the risk on the money markets ? And why would any sensible person buy a SP loan given to "ninjas " , what a fool .

[InformedTrades]

Hi Dave, Firstly I think you are doing great work here and have a nice way of explaining things. My understanding is that many of the writedowns are coming because the banks have agreed to be a lender of last resort to these off balance sheet entities holding and have therefore effectively transfered the risk back onto the balance sheet. Is this accurate or is it coming from them holding the lower quality parts of the loan? Any input you could provide would be appreciated. Thanks Dave