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FRM: Synthetic collateralized debt obligation (synthetic CDO) c squared financial

by Langsongshipin123



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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FRM: Synthetic collateralized debt obligation (synthetic CDO)

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FRM: Synthetic collateralized debt obligation (synthetic CDO)
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27 comments

OudPlayerHBY 12/09/2021 - 9:29 PM

This monstrosity almost ended capitalism

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#THeXDesK 12/09/2021 - 9:29 PM Reply
Noésis & Associates 12/09/2021 - 9:29 PM

Such deep content

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Ioannis Lazaridis 12/09/2021 - 9:29 PM

Excellent explanation ! Thank you sir .

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CaesarRIO 12/09/2021 - 9:29 PM

people are so sick for money

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Alex Mo 12/09/2021 - 9:29 PM

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?

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Kshitij Tripathi 12/09/2021 - 9:29 PM

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

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Hana Amin 12/09/2021 - 9:29 PM

Hi. Can I ask, where does AIG fit in in this?

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Vinay J 12/09/2021 - 9:29 PM

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?

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Bora 12/09/2021 - 9:29 PM

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?

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Bora 12/09/2021 - 9:29 PM

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

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Sally Scott 12/09/2021 - 9:29 PM

DUDEKRISHNA…….BECAUSE THEY COULDN'T SELL THEM………WHO WANTS TO BUY THE TRANCHE THATS GOING TO TAKE THE FIRST HIT ?…….THOSE SOPHISTICATED INVESTORS WHO WEREN'T SO SOPHISTICATED, WERE NOT TOTALLY STUPID…….THE BANKS WERE FORCED TO HOLD THEM BECAUSE THEY COULDN'T FIND A SUCKER THAT STUPID……..

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Master Arabic 12/09/2021 - 9:29 PM

Why does the senior tranche receive anything at all? They have not invested anything. Why should they get any return?

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JK Low 12/09/2021 - 9:29 PM

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.

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GopalaKrishna NarayanMoni 12/09/2021 - 9:29 PM

Aaah, that makes it clear now.. Thank you for replying..

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Anton Grazin 12/09/2021 - 9:29 PM

OTC. No underwriters

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Anton Grazin 12/09/2021 - 9:29 PM

synthetic CDOs = more counterparty risk than normal CDOs but can be written/purchased on third parties for notional values

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Sergey Prokofiev 12/09/2021 - 9:29 PM

So synthetic CDOs expose investors to less risk than normal CDOs?

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Simon Frater 12/09/2021 - 9:29 PM

….likely to default, as they would lose out if this happened

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Simon Frater 12/09/2021 - 9:29 PM

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

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GopalaKrishna NarayanMoni 12/09/2021 - 9:29 PM

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!

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GopalaKrishna NarayanMoni 12/09/2021 - 9:29 PM

Sorry, but it is not clear why the bank will retain the riskiest piece of the whole tranches – the equity/residual tranche!!

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J.D. Marlin 12/09/2021 - 9:29 PM

Thanks for the explanation! It really helped out!

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lalocamd 12/09/2021 - 9:29 PM

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!!!) 🙂

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zwarst 12/09/2021 - 9:29 PM

soon we shall say cd-oh dear…

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nickstar717 12/09/2021 - 9:29 PM

cdo is a massive scam, jus think if only 9 of the 100 big companies go bankrupt, it means DESTRUCTION for everyone. fuck i hate cdo more power to those fucked up bankers

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Bionic Turtle 12/09/2021 - 9:29 PM

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

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