Comments on: Synthetic CDOs, Ratings, And Super Senior Tranches: Part 1

By: erdosfan

erdosfan — Fri, 03 Apr 2009 20:24:14 +0000

John,

I must disagree with you here. What YOU are describing are marginal default probabilities, i.e., the increase in the probability of default from year to year. This table gives the actual distribution of defaults in the past, which we then interpret as descriptive of the probabilities of default.

By: John

John — Fri, 03 Apr 2009 20:11:59 +0000

I just wanted to point out that the above Moody’s default chart contains default probabilities, not marginal default probabilities, so that the probability that a B rated bond will default in year three is actually 6.92% (19.77%-12.85%), not 19.77%.

By: How To Speak “Structured Finance” « Derivative Dribble

How To Speak “Structured Finance” « Derivative Dribble — Tue, 31 Mar 2009 14:20:43 +0000

[...] that cash is generated, it gets funneled to and split up among the investors. For more on CDOs, go here and [...]

By: Synthetic CDOs, Ratings, And Super Senior Tranches: Part 3 « Derivative Dribble

Tue, 09 Dec 2008 01:40:17 +0000

[...] the previous articles (part 1 and part 2), we discussed both the modeling and rating of CDOs and their tranches. In this [...]

By: Synthetic CDOs, Ratings, And Super Senior Tranches: Part 2 « Derivative Dribble

Fri, 05 Dec 2008 03:39:12 +0000

[...] only one payment at maturity. Further, assume that we have conducted several hundred thousand simulations for our CDO and constructed the chart [...]

By: acc

acc — Thu, 04 Dec 2008 18:31:52 +0000

Since you discuss payment waterfalls and super senior, you may be able to answer this question: It appears that policymakers are trying to delay mortgage defaults, so that the process of default gets drawn out over a longer period of time (e.g. foreclosure moratoria). Doesn’t this process, increase the likelihood that the supersenior tranches will face losses. Or more specifically, doesn’t this allow mortgage prepayments to be directed to lower level tranches for a longer period of time — before the defaults are realized — and thus reduce the recovery available to the super senior?

By: erdosfan

erdosfan — Thu, 04 Dec 2008 02:55:58 +0000

It’s not complicated. You are indeed correct. It should be evident that tranches form a ladder of risk. Subordinated AAA notes (those with something above them) though very safe investments, should be riskier than AAA notes that are senior to all other tranches.

By: Don the libertarian Democrat

Don the libertarian Democrat — Thu, 04 Dec 2008 02:47:11 +0000

I had a feeling you were out there, but I didn’t want to keep requesting that you do this work. It was beginning to seem presumptuous. However, one question on the Alphaville Graph:

How can it not be apparent that it’s a ladder of risk, with the riskiest at the bottom? I’m still not so sure what’s complicated about reading that graph. It might be complicated to create the levels of risk, tranches, but the graph doesn’t seem that unclear.

Take care, and thanks, as always, Don