Collateralized debt obligation overview발음듣기
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Collateralized debt obligation overview
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We've seen that an investment bank can buy a bunch of mortgages, which essentially makes them the lender to the homeowners, and then it could stick those mortgages inside of a special purpose entity.발음듣기
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And then it could sell the shares in that special purpose entity, and that these shares would be called mortgage-backed securities.발음듣기
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And let's just say, just for the sake of argument, when it sells these shares it sells them at $10 a share, and it promises dividends at $10 a share, the equivalent of an 8% yield.발음듣기
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So maybe the homeowners here are paying a higher than 8% interest, some of them default, once you average everything out, and the investment bank keeps a little bit for itself and to do all the operations and all the overhead, and so it can actually give the investors an 8% yield.발음듣기
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They might like the safety profile, the risk profile of the special purpose entity of this mortgage-backed security, and they might like the return, and they might go for it.발음듣기
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But there might be a class of investors, may be very risk-averse investors like pensions, that says that this mortgage-backed security is too risky.발음듣기
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They've looked at what we're holding, and they are like, hey, some of these are sub-prime mortgages, some of these are shady, some of these are to risky borrowers.발음듣기
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And even if they can't look under the hood to see what this is, the investment bank might have hired a ratings agency.발음듣기
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So maybe a ratings agency to essentially look under the hood and tell investors what's there.발음듣기
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So the ratings agency might look at this special purpose entity and look at these securities and say, look, I would say that these securities should be rated BB.발음듣기
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So you might have, maybe there's some risky hedge funds, and not all hedge funds are risky, but let's say that there are some risky hedge funds, and then they say that this yield is too low.발음듣기
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And the investment bankers, they're very creative people, they say, well, look, here's some people who want to buy securities, but these securities are too risky for them.발음듣기
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And there's other people who want to buy securities who are able to take on more risk, but they say the yield is too low.발음듣기
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So instead of losing out on these investors, why don't I just split up this special purpose entity in a different way?발음듣기
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And they're often called the senior tranche, the mezzanine tranche, I'll just write "Mez" for short or the middle tranche, and then the equity tranche.발음듣기
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In this situation, when you split it this way, the holders of the senior tranche securities are going to get paid first.발음듣기
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Only when they are made whole are the owners of the mezzanine tranche security is going to get paid, and only when they are made whole will the owners of the equity tranche security will get paid.발음듣기
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Well, now the ratings agency will say, well, look if the senior people are going to get paid before everyone else, then I'm going to give them a higher rating.발음듣기
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And they can even get insurance on this and get a credit default swap, and then maybe they'll give it a AAA rating, and which means that the pensions can now buy the senior rated CDO's.발음듣기
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Maybe the mezzanine, they get paid next, they'll get maybe still a BB rating, and they'll get the 8%.발음듣기
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Pietro Cavallini, The Last Judgment
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