Collateralized Debt Obligation (CDO)

[t0nyd4tiger]

you saved my day! great explanation.. but i think you need a new pen =) thanks!

[wyt168]

Since MBS is a security and has liquidity, as Sal has pointed out in the video, it can be traded, which means its price fluctuates. I am trying to figure out how its price is related to the mortgage interest. My broker showed me a chart of FNMA 30yr, and told me that the underlying security shows opposite trend of the mortgage rate, i.e. the higher the price of the stock, the lower the interest rate, and vice versa. I haven't figured out why this is the case.

[tangiblephoton]

The reason everyone isn't an equity invenstor is because Sal's pen isn't working

[dreamtiger347]

sal can you please explain what an hedge fund is and does

[dreamtiger347]

khanacademy  can you please explain to me what an hedgefund is and does thanks

[orpcowboy]

Nice series of videos. You need to stay realy focussed though. Just one thing: untill the last video you introduce everything in a timely and structured fashion (a + too for your summaries along the way). However, when you finaly get to the third video, the one where you finaly hope to learn what a CDO is, you just fling it. Except for some murmle along the way we have to wait until the end of the video before you use CDO, and even then you do not actualy explain what it is.

[yougonasorry]

no in my opinion this casual presentation was really good in terms of conveying a better understanding of the topic, thank you sir

[comingsoon188]

dude you talk so fast i can't even know what are you saying. sigh :\

and i'm not western people tho so i'm not really good on it

[bassammaelborno]

The saying goes....."a true sign of genious is in one who can make the Complex, Easy".

Thank you for your effort.

It would be more helpful in a variety of ways, if perhaps, you were more structured and rehearsed prior to giving a presentation.

There is far too much of an ad hoc approach to the 'lessons' resulting in unnecessary redundancy/repetition. You aren't losing the message to the viewer, rather losing the viewers attentiveness/patience.

[adelaideuser]

very well explained, thanks !

[donniet1977]

Thanks! Great work. Somebody get this guy a new pen!! Lol

[backtoCCCP]

what's wrong with the pen???

[MrBigEnchilada]

mbs = mortgage backed securities ~ (similar) to asset backed securities.

yes

watch bionicturtle he is dedicated to financial lectures.

this is pretty much why few people understand this...khan draws a huge picture and tries hard to explain what he drew lol...ty

[ngopalakrishna]

I havent seen many better videos.. Folks like Khanacademy and Bionicturtle are just too good.. thank you guys!

[heyathere1000]

more people need to see this for sure.

[Lucien618]

Wonderful videos man thank :)

[mangonit]

mate these are some of the most helpful videos I have ever found on youtube. I spent a collective total of nearly £30 on books to do with this recently, and these free videos have explained it all 10 times better than any of those books ever did. Thanks!

[Wamy85]

I think you also forgot to mention that not only do they loose their interest, but also if 30% defaults, then the 1500M Equity also gets wiped out from the Equity investors- so they loose the interest and the principle.

[jaroslav44]

THANK YOU

[KoalaBearWarrior]

One question: At 6:37, when you are explaining the Mezzanine tranche, why do they get 21 Million each year, instead of more? I thought the senior tranche was 6%, then, on a per year basis, they should get less than the Mezzanine tranche, not more. I understand, how the numbers are computed, but I don't get intuition behind them. Thanks! 

[ABCInfinit3]

@KoalaBearWarrior There are 400k shares of senor and only 300k of mezzanine. Because of each share being 1k Senor has 400m and Mez has 300m total. So with the interest rates given mez is getting 21m and senor is getting 24m. The reason mez is gaing more is because they have that 21m gain split amongst 300k shares instead of 400k. So mez would gain more per share but less total because of the total amount of shares of mez being lower.

[KoalaBearWarrior]

@ABCInfinit3 I can't believe I overlooked that! Thanks man! Looks like we're helping each other out on different vids :)

[hanjunjade]

@wackojacko336 Shut up fucker. This dude took the time to explain something useful to your stupid ass. For free. So go shove a real pen up your nose and into your brain because really, if you can't understand, your brain aint doing you any good anyway.

[ThyHolyHandgrenade]

so is that to say that, in the case of defaults, however severe they may be, the interest rates for the senior and mezzanine investors remain the same, but for the equity investors, the rate changes to be only whatever is remaining? (bcos, you said in a default event, the former 2 still get 21m and 24m, but equity guys get only what is remaining?

[bibzzzz]

@ThyHolyHandgrenade (For this particular example) I understood it as follows: if enough people default on their loans such that the overall return on the 1 billion dollars is under 45 million dollars, returns of the mez tranche start to diminish (and equity investors get no return). And then to take it one step further, if the overall return goes below 21m then senior class returns start to dimish (and both equity and mez tranches get no return)

[mrsbart100]

"tranche" is a french word meaning slice.

[Ratteristruth]

kill this fucking lizard

[166mirna]

Does anyone know, which video the following part is of " Collateralized Debt Obligation (CDO)" ??????

[JasonRox88]

Great learning tool! Top notch.

[TheExxonMobil]

Okay I've got a question:

Under the assumption that this is an interest only loan, there will be a payment of $1billion at the end of the ten years. Otherwise the borrowers wouldn't pay any interest.You said that if 20% of the borrowers default with a recovery rate of 50%, there will be a yearly payment of $90m. At which point do the borrowers default in your scenario? I can't imagine a case in which there would be a yearly payment of $90m and a full payback of the $1 billion.

[jgc1077]

Way, way, way too fast.

[subarusti62]

find that damned pen!

[amalmansy]

"greed was good, now it's legal" right??

[smokenfly514]

How/why can the security's value increase? Decrease, I understand, but how can a MBS' value increase? Thanks

[philippo2222]

@smokenfly514

imagine there is a market where u can trade the MBS like a general share on the exchange market. For example...the demand for the MBS is high, the price will increase.But if the supply is high (higher than the demand, the price (value) will decrease. This is how the price or value of the securities can increase or decrease

[smokenfly514]

@philippo2222 Thanks, but I think it also depends on interest rates and the risk-free rate as well as the coupon on various bonds.. supply & demand don't magically fluctuate, there are underlying causes. If interest rates increase, for example, the derivative would have to trade at a discount, because theoretically you'd get a lower return on your investment otherwise. People's outlook on real estate/credit markets could also play a role (why would you pay par value if everyone is defaulting).

[smokenfly514]

@philippo2222 just replying for fun lol

[DanielleKHaaay]

Thank you so much for this series. I am working with an MBS client and needed a crash course-- can't even tell you how much this helped! All the best.

[john5927572]

Can someone help me. So how exactly are the banks not losing money if they are paying all these interests out? Where is the bank making it's profit? Do the interest rates the borrowers pay make up for what the banks have to pay to all the investors who purchase the CDOs?

Great video though

[landwarrior82]

@john5927572 Banks make profit by charging higher interest to borrowers and paying lower to lenders. Infact Private & Investment Banks activities r beyond these interest rates. They make money by charging fees over M&A transactions, investment products etc. They manipulate the markets by being market makers and make money. Their major cost is salaries to executives.

In nutshell they make huge monies by making fool to common man.

[john5927572]

@landwarrior82

Oh ok yea i see now. How would the investors get their principle back though because I mean the SPO's are paying them a certain percentage every year on the money they invested but how do they receive their principle back?

Thanks for the help.

[landwarrior82]

@john5927572 what do u mean by SPO? There r lots of products which banks offer. And principal payment is subject to the type of products they offer.

[john5927572]

@landwarrior82

Oh i meant the Special Purpose Entities. When do the investors get the principle back on the CDO's they bought? Thanks

[statelesswarrior]

MOST AMERICANS/ BORROWERS AND INVESTORS -- PERIOD -- WAREN'T SOPHISTICATED ENOUGH TO SEE THE APR (ADJUSTABLE RATE FLOATS LIKE A TIDE WHICH LIFTS ALL SHIPS) ON THE BORROWING END, AND THE CDO (COLLATERIZED DEBT OBLIGATION) ON THE INVESTOR'S END, THUS BOTH GOT FUCKED. AND ONE ARMANI SUIT IS ALL IT TOOK TO IMPRESS. . .

[lrajoo11]

I have a question, you said when they default such that the loan loses 50% of its value, the return for the top tronch goes to 0%. But what about the principle...doesn't that drop to 500 million as well? What are the losses there?

[investmentlb]

@lrajoo11 Sal only has 20% of the pool default @ 50% severity, which = $100mm of losses. So, the first portion of that loss goes to wiping out the cash flow the equity would have received during the year, which would have been $45-$55 million, depending on the timing of the losses. Let's assume $50mm. That leaves another $50mm of losses unaccounted for. The equity tranche would absorb that loss - so its face value would be reduced from $300mm to $250mm, creating a permanent loss for equity.

[investmentlb]

@lrajoo11 Sal only has 20% of the pool default @ 50% severity, which = $100mm of losses. So, the first portion of that loss goes to wiping out the cash flow the equity would have received during the year, which would have been $45-$55 million, depending on the timing of the losses. Let's assume $50mm. That leaves another $50mm of losses unaccounted for. The equity tranche would absorb that loss - so its face value would be reduced from $300mm to $250mm, creating a permanent loss for equity.

[UTubePressOnline]

HOW ABOUT THIS WE GO TO THE BANK YES WE AND THE BANK CREATE NEW MONEY WE GET £10.000.Say AND THE BANK GETS £10.000 SAY .ALL AT THE SAME TIME ON THE SAME DAY..NO ONE OWES..NO ONE..WE ALL GOT OUR MONEY..AS WE CREATED IT.SO THE old WAYS OF BANKING OUT OF Dated.ALL BANKS AM going uder.UK GOVERNMENTS AT TO BUY ALL THERES AND EU AND USA ....AM LIKE GREASE BANKRUPT NEARLY..ITS GOING TO BE A BIG WW3 THATS Y THERE WARS SOMETIMES TO START NEW WORLD ORDERS AND THE ANWER HERE WITH US

[digitised]

@UTubePressOnline cocaine is one hell of a drug eh?

[TTscalper]

great video!

[gabriellamariee]

lol, he said shady.

[adilmk123]

awesom

[bryanthebarber]

would asset backed security cover cds and cdo and all the unsecure debt that people try to bank on.

[bryanthebarber]

so what your saying is If a bank creates a special purpose entity in order to break down its company into share to get its money from investers, then those who lost there home after it adjusted effected stock holders of the special purpose entitys etc. bankrupting there mutual funds, portfolios, investments, and all there 401ks etc. so it didn't bother there dollers,but made them not spend any, therefor ruining markets that depend on sales. so people lost there job cus companys went under?

[djslug2000]

55 million out of 300 is not 16.5 rather 18.3

[thegoonist]

so essentially the I-bank is transferring the risk (whether those homeowners are able to pay off their mortgages) to the shareholders?

but in this case, if all the interests from the homeowners are given to shareholders in dividends, the bank gets nothing? unless...it earns its profits solely through selling its company's stock???

[Boltstorm181]

very good teaching

[lavpatel39]

dude!! your series are simply great..... it clear my most of miss dots.... great complete work

[Mrfanatic85]

u are a pro...u shld be wrkng fr wall street..

[mike11022]

I'm pretty sure CDOs are not derivatives. CDOs are simply ABSs with defined tranches ranked by seniority.

If you have a total return swap on a CDO portfolio, now that's a derivative.

[Geotubest]

Nice, but get that pen sorted out. : )

[catze4]

good job! thanks!

[chandrakanthgreddy]

wow!! that was great!!

[akshayswaroop]

You are the man!!

[aamir6666]

thanx a lot !! this wz really helpful

[personova]

Well what are the real risks?

1) Asset risk is only realizable in conversion of the underlying asset class based on market conditions. The tranche market is not important, or its risks. What is important is the base asset class risk. Mainly, defaults and price erosion.

2) Complexity discourages accurate pricing and risk exposure. So the uneducated rely on a rating agency who is just as ignorant = AAA rating that is really junk.

[tothatextent]

Do you have a lesson on Total Return Swaps?

[impalapez]

I'm turning my whole yard into an edible garden...You can't eat paper, or gold, or silver for that matter...sure commodities are good, if you can use them...otherwise...money is worthless...

[BBCcashville]

I wish I would have watched this in 07.....lol

[Deveiel]

You need a better pen.

[anolmec]

Exactly where did this collection of "collective borrowers" come from? That statment is misleading. Where in the mortgage contract, that each individually signed, does it say that they agree to CONVERT their INDIVIDUAL promise to pay into a collection of co-obligators to pay? My mortgage gives a "right to tranfer" NOT a right to convert it into something else.

Thanks for exposing what seems like the BIGGEST FRAUD SINCE THE DISCOVERY FIRE.

[DaveLG526]

You just agree to pay --write a check-- to someone. That someone may do whatever they want with your promise to pay including selling that promise to someone else (this happens all the time)

[CenseSay]

nice videos dude...did u learn all of this on ur own time or did u major in accounting or something similar?

[daniT81]

Very good video, thank you!

[jgposner]

OK so I saw all your videos up to this one so far and I understand them all. This question may seem silly but here it is. IF Collateralized Debt Obligation is simply a Mortgage-Backed Security (or asset backed security) organized to provide different returns for different levels of risk, THEN why such a drastic name change. Shouldn't they have named them something like Risk Adjusted Mortgage Backed Securities? Or why change the name at all? Did they evolve separately or something?

[joneselius]

It misleads people, the reason anything in economics has any name at all is to mislead.

Would you rather read a book titled, how to cook or how to keep your produce healthy within a heating enviroment.

It's all about word play, just like a credit default swap, basically, fraud.

[jgposner]

Thanks for the input but I'm not looking for a conspiracy theory. Please don't muddy the waters, this stuff is confusing enough. The fraud is easy to see here however I'm sure not every term in economics is meant to mislead.

[joneselius]

I'm pretty sure it is, as economics these days is little more than a 'club' unto which only people who really don't want to work real jobs look into.

Nothing happens any more, no real trade, just fraud and money laundering, and that's NO conspiracy, even watching half of khan's videos will show that. And the terminology IS misleading, for example:

MONEY, CAPITAL, STIMULUS.

None of these mean what people think.

Capital isn't on computers.

Money isn't paper.

Stimulus, don't start me!

[jgposner]

I see where you are going. If we didn't have the profession of economics, the world would still spin, people would still buy and sell. Economics is just a way of creating models of how we should that. The more clever you are in creating those models, the more advantage for your employer or special interest has. Money is a useful term, however, it is a creation of man. It can be anything we want it to be. Some very clever people have convinced us with models that our current system is best.

[sonny51261]

I'm not an expert. I think it is because a CDO is not a Security. Thus it cannot be a Risk Adjusted Mortgage Backed SECURITY. A CDO is actually just a law contract, and they are usually constructed with copious input from lawyers. The contract simply says when and how different investors will receive returns based on how the risk was adjusted between them.

[ZWATER1]

great info bro peace.

[spenseravery]

the more that you help me understand this mess. the more that it looks like a Pyramid scheme.

[brwin]

It is, the investment banks are on the top.

Im kidding. (sorta)

[surfinguy69]

tonyalfrey ..not happy = no need to watch.

[funnyoforinger]

one question, how did this lead to non-deposit mortgages?

[ropeyarn]

Because the originating local bank has no risk in the mortgage after it sells it to the investment bank, the local banks gave mortgages to high risk borrowers, flooding the system with worthless paper.

[anemieasy]

pie = we r screwed

[ZenSlider]

Very easy to understand. Top marks. I have a question: What would the specific term be for the credit card (or auto loan) equivalent of an MBS?

[khanacademy]

Asset Backed Security (or ABS) is the most general term that would cover all of the above (including MBSs)

[mikeyooh7]

@ZenSlider most of the time they are all lumped into asset backed securities. Credit card receivables are the specific abs

[EminemChannel]

This is very interesting since u can do this with any type of debt including personal loans that are collateralised in other words backed with some sort of assets such a car or something.

[tonyalfrey]

Your issues/fussing with your "pen" consume half of what would otherwise be an instructive video and make your audience doubt your veracity and professionalism. Prepare your tools in advance.

[WHEATTHlNS]

As someone who has followed Sal's videos from Trig right up to current Calculus class (and these videos as an aside to current events), I'm going to say anyone who doubts his "veracity" or "professionalism" is merely doing so to get a dig in on a Friday night.

[tonyalfrey]

I stand by my comment which, perhaps, WHEATTHINS might want to read again so that he/she may understand it better. I will re-phrase it for his/her benefit.

a. The video is instructive.

b. The video would be much better, and for some, more credible, were the presenters tools working properly.

It would have been easy to have stopped the video, fix the tools, and re-shoot. That would improve the professionalism of the end product (sorry for the mixed metaphor).

[eudolph]

your pen is more annoying than all the math here :/

[U2BHistory]

I'm seeing the Bailout videos on the way. Looking forward to them. More people need to watch these. It should be required viewing for people.

U2BHistory

[jmk1a1]

It's sad that a video about credit derivatives (the reason for the collapse of the financial system) gets 44,000 views, but Lil' Wayne's latest rap video gets 8 mil hits.

[MoroccoFriendofUSA]

That's why rich and successful people are less than 2% of the world population.

[jmk1a1]

true!!

[boeing747200lr]

@jmk1a1 I think thats bcoz one doesnt have to use his or her brain to understand Lil waynes rap. No thinkin required, so no effort. Whereas, here you have to put in effort to concentrate, think and understand and thats not everyones cup of tea.

[nightsnyper]

@jmk1a1 i like boobs

[jmk1a1]

@nightsnyper As do I my friend… as do I.

[ZLi0n]

@jmk1a1 cattle go and look where they are directed

[kensho3]

Huh?

[Eggy0]

There's an impending financial collapse scenario involving synthetic CDOs being highlighted in these videos:-

watch?v=Z8EHcHjsZMk

watch?v=Il1_A77OAIQ

Interested to hear the opinion of someone who understands them!

[tiansheng146]

??? on 6:58, the 55M return of 300M would be 18.333% return, not 16.5%

[kittykattykoo]

oh, you're right. what's what I got too. but well, we got the idea. that's what important. :)

[back2root]

@tiansheng146

jap, thats what i thougth to.

[robrown1]

Google UNIFIEDMARKETS.

[andreamirelez]

great video

[baldyman1989]

Thank you for your very insightful video on colaterized debt obligation.This has gave me a greater insight on how credit crunch has effected todays bank sectors.Regards Robert.

[thecook007]

Looks to me like a exploded view of a dog's paw! Just read that total derivative trades exceeded one quadrillion dollars. More than the GDP of entire world. (60 trillion) Gamblers can bet as much as they want, backed by nothing!

OH NO!!!!

[63933147]

want to know much about this

[Sauravnagendra]

This is a very good presentation which gives fair idea about CDO. I wish this sort of presentaion for other fixed Income products is being posted by the presenter.

[ddubrul]

that damn pen!

[JosephHeartSatan]

hahaha

[kiepie85]

lol

[ubornthick]

All those squiggles look like a sausage machine for extruding the financial equivalent of soylent green .

Should  it really come as a surprise that a financial system that chases its tail will dissapear up its own AAA.S when the music stops?

[cvalmart]

Really good presentation. So, the bottom line is the CDO is actually the SPE ?

[xzxz619]

Where can I invest in howards stern newlly anticipated anual rings?

[AsianAmerican68]

The Era of U.S. Hegemony is coming to an END.

The US will soon become another ENGLAND... a "HAS BEEN".

50 years ago, "MADE IN USA" meant quality.

Today, "USA" anything means FRAUD, JUNK, and JOKE... starting with KING GEORGE, their Elected Leader... another JOKE!!

[Green7Hornet]

Is there any risk that in the wake of wall street being taken advantage of by mortgage brokers that they will become cynical about the world and stop doing all the wonderful and good things they do for all of us?

[XionXXXX]

It's one huge PONZI SCHEME, and it's going to collapse soon along with Wall Street.

ALL PONZI SCHEMES EVENTUALLY COLLAPSE.

[caffeine1]

No, it's not. Influx of cash comes from people paying their mortgages.

[Green7Hornet]

lol

[ljohnson79]

read a book.

[tompaah7503]

Wow, thanks for this four-part series! Really helped me understand what's going on right now.

[bigsean628]

it really help! thanks a lot!

[PKATIYAR1981]

great Job.!!! Would love to see more videos on other financial instruments.

[lilnev2000]

Thanks for doing this video. This ties in to the discussion I had on my blog at Zacks about CDO's and mortgage backed securities. I'll link this video to my blog post.

[josecitomadera]

Could you cover SIV's and the new plan brought up by the 3 largest banks to supposedly bring stability to the credit markets?

[thisismyname007]

Let's suppose the mortgages are second mortgages for slum property in Detroit. And let's suppose no one is living in those properties either. Or maybe these are New Orleans slum properties. How does that affect your calculations?

[Anonymous11235]

Agreed, josecitomadera. Keep up the good work.

[josecitomadera]

I wanted for the longest to understand these things without having to read an exhaustive tome using arcane financial terminology. You made it easy. Keep up the good work and make more videos on other esoteric financial instruments and mathematical ideas.