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



The key difference between a cash and synthetic CDO is: instead of selling the reference portfolio (loans), the originator (bank) purchases credit protection with …

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FRM: Synthetic collateralized debt obligation (synthetic CDO)

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FRM: Synthetic collateralized debt obligation (synthetic CDO)
c squared financial
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29 thoughts on “FRM: Synthetic collateralized debt obligation (synthetic CDO) c squared financial”

  1. 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?

  2. 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

  3. 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?

  4. 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?

  5. 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

  6. 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……..

  7. 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.

  8. 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

  9. 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!!!) 🙂

  10. 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

  11. 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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