FRM: Synthetic collateralized debt obligation (synthetic CDO) 

He goes into more detail than when Selena Gomez described it in THE BIG SHORT.

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

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

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

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.

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

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

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?

Excellent explanation ! Thank you sir .

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!

soon we shall say cd-oh dear...

So synthetic CDOs are basically securitized insurance contracts where cash flows from premiums take the place of cash flows from principal/interest from regular CDOs?

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

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?

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

Such deep content

And I know what you're thinking. What the f... is a synthetic cdo?

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

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!!!) :)

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

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?

instructions unclear, crashed the market

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

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

Thanks for the explanation! It really helped out!

soon

OTC. No underwriters

people are so sick for money

#THeXDesK

This monstrosity almost ended capitalism