Why are they describing CDOs as credit default swaps?!?!!?!? Isn't a synthetic CDO a CDO made up of CDOS??? can someone correct me if im wrong? im going BANANAS!
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swaps are insurance on bonds(cdo) sythetic cdos are two parties make a "bet" on a structured product if it will fail or not cdos are usally pools of debt products(loans usally) that act as a hedge the ideal is not all the loans mixed in the structured product(cdos) will fail they usually use the couplet(sp?) formula to couple(sp?) risk but after this financial crisis they use other methods to price the risk of each tranche(usally high risk loan slice med risk loan slice no risk loan slice or just regular loans etc)
you can also buy swaps on each tranche if i remember correctly
thus in summary
sythetic cdo = bet on a cdo failing/ being sucessfull cdo = pools of debt securities swaps = insurance on the cdo tranche = common risk securities mixed together
CNBC and David Faber are fcuking pathetic - 80% of the shit in that mocumentary was plagiarized from Bethany McLean's January 2010 piece in Vanity Fair.
I think a synthetic CDO is made up of a shit-ton of credit default swaps. Like the long side sells the swaps and the short-side buys them. The book The Big Short by Michael Lewis explained the whole thing really well, but it's been a few months since I read it and I didn't bring my copy up to school with me... my bad
This is how I understood it though:
Mortgage bond = bundle of mortgages sold to a bank and securitized CDO pays out cash streams from underlying mortgage bonds CDO1, CDO2, CDO3, etc., pays out cash streams from underlying CDOs CDS = buyer pays fee for insurance, seller must pay if there is default on underlying asset Synthetic CDO = Crap load of CDS's so it's like buying the bonds for the long side that sells the CDS's even though they didn't actually buy them
LMAO at Squirtlez avatar btw... for some reason, every time I look at it I hear the lines from the Scarface final shootout scene in my head
jimbo's got it. Basically a synthetic CDO is just a regular CDO, but instead of mortgages, it's made up of CDS's. The insurance premiums on these CDS's mimick interest payments on mortgages, with the principal being lost in both cases when a default on underlying mortgages occurs. It is "synthetic" because it mimicks the mortgage-backed standard CDO's without any real mortages, and can be created from scratch over and over without new mortages being made (just need more people to buy/sell insurance/CDSs).
Learned it from the Big Short also, definitely a great explanation of it all.
A bet on a CDO failing, as squirtle mentioned, is just another CDS on that. (I think)
no you can buy cds on any corporate debt as well
I didn't say you couldnt. You're right though.
That is surprising that Big Short got mixed reviews. I thought it explained everything very clearly and in an interesting way, and I'm a relative finance beginner. The characters are all pretty funny.
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