I say this all the time, but these videos are so clear they make me angry. I’ve been trying to grasp the idea of what a tranche is for hours and still didn’t get it. This made it clear in 4 min.
I studied engineering in college, and very good at math, have a strong logical side to my brain, but every explanation I’ve seen of this type of financial instrument is way too fast and skips over details that make it hard to understand the very heart of the issue.
MBS and ABS can be repackaged into tranches as well. The defininition of a CDO is that you collect junior tranches of various MBS/ABS (BBB rating or lower e.g. equity) and put them together into a new financial product and slice them again into new tranches and that is the CDO
@@sytec99 it can but it's not the main criteria to package different kinds of securities. They can be of the same kind, like the case Khan showed here. The key is really being asset backed (collaterized) and having tranches.
There are a few things I don't get. Firstly, what does the 8% yield part mean intuitively? Secondly, are the pension fund and the hedge fund buying the mortgage-backed securities from the special purpose entity?
it is the return the investor receives if you hold the bond to maturity. Usually, a change in yield doesn't alter the mechanics of the security itself but rather the price one is willing to pay for it... the higher the yield, the riskier and cheaper the security becomes.
Here is the catch. the rating company could be involved in the CDO's like moody. they give it higher rating then it should. that way it allows the pension fund manager to invest in this unregulated S.P.E. I think thats why fanny and freddie have 3 trillion in real estate foreclosures still unsold on there books. they would collapse the market to its true level if they put them up for sale. so its allowing the senior to get paid first then it goes up for auction.
So what you're telling me that CDOs are still being traded but under the 'tranche' name? Can anyone tell me what ultimately happens to wealth in a default? Does it just vanish, or is it ALWAYS recycled in some form or fashion?
not sure what you mean by a "tranche" name, but CDO is just a generalized term for the security. Yes, structured finance is a big market and still is created and trade all the time... they're backed by things like credit cards, auto loans, mortgages, whole businesses, could go on. There's been more regulation but they have good return profiles. Depends what the default is... a mortgage defaulting can have recoveries after the house is sold on the market. There are certain instances where the issuer goes through a default, and these securities are bankruptcy remote vehicles so the collateral stays with the security. In that case, payments get made sequentially down the waterfall, and if you don't get your principal back in the investment, its just a loss. Its a risk you're willing to make when you purchase the bond. There is, however, a lot of litigation going on over the mortgage backed securities due to fraud which paid back money to investors
not really... tranche is just the name for the specific bond an SPV offers. in the event that an underlying asset backing a CDO or other securitized product goes into default, it is liquidated, and the resulting principal is returned to investors and the tranche experiences a write down wherein the note is amortized more quickly than it would be otherwise. The idea of it being "recycled" to form CDOs is somewhat true, but movies like the big short overplay how much it happened. At most, ~10% of the market was made of CDOs, and probably far fewer were ABS CDOs (or CDO^2s as the movie calls them) See here (en.wikipedia.org/wiki/Subprime_mortgage_crisis#/media/File:Securitization_Market_Activity.png). In reality, if a bank were unable to sell a tranche in a given deal, they would typically hold onto it and assume the risk themselves else offset the risk with other credit derivatives.
This isn't a CDO. CDOs are when you take the bad debt and create a layered security which is rated triple A in parts. Here Khan has just described a Tranched MBS.
+Tadhg Muircheartaigh I think you are thinking of a CDO squared which takes the junior tranche of a CDO and breaks that into tranches where the senior tranche becomes AAA. This is definitely a CDO.
different returns, senior tranches have credit support of the tranches below them. It depends on your risk appetite and one security that is carved into tranches can satisfy different investors with different risk/return profiles
In CDO's every tranche is rated separately, whereas all Mortgage Backed Securities are rated the same. Hence CDOs cater to more investors, both risky and safer ones
who came here after watching the big short
I've got an interview next week and this has been super helpful. The visual examples put everything into place. Thanks!
how'd it go?
I say this all the time, but these videos are so clear they make me angry. I’ve been trying to grasp the idea of what a tranche is for hours and still didn’t get it. This made it clear in 4 min.
Clear and precise, thank you.
By far the best explaination i have seen.
THAAAANKS MAAN - couldnt get it for hours and now I understood it in 4 mins 💪🏽
Awesome video. Explains the CDO/CMO very well. Saved me reading the chapter to understand the concept.
I read through the whole wikipedia article of mortgage backed securities and I couldn't find something similar to your explanation
I can't believe it can be this good
This video really was great
Well explained.
What's the process of each and how long it takes to get converted cash?
I studied engineering in college, and very good at math, have a strong logical side to my brain, but every explanation I’ve seen of this type of financial instrument is way too fast and skips over details that make it hard to understand the very heart of the issue.
Sorry to say that, but that isn't a CDO yet. It still is just a ABS/MBS.
so what is a cdo?
It is... its CDO because on top of a normal MBS, its repackaged into tranches. that is the key feature of CDO.
@@tilarmeister exactly
MBS and ABS can be repackaged into tranches as well. The defininition of a CDO is that you collect junior tranches of various MBS/ABS (BBB rating or lower e.g. equity) and put them together into a new financial product and slice them again into new tranches and that is the CDO
@@sytec99 it can but it's not the main criteria to package different kinds of securities. They can be of the same kind, like the case Khan showed here.
The key is really being asset backed (collaterized) and having tranches.
You try to give the video more brightness it will be great if you do
There are a few things I don't get. Firstly, what does the 8% yield part mean intuitively? Secondly, are the pension fund and the hedge fund buying the mortgage-backed securities from the special purpose entity?
it is the return the investor receives if you hold the bond to maturity. Usually, a change in yield doesn't alter the mechanics of the security itself but rather the price one is willing to pay for it... the higher the yield, the riskier and cheaper the security becomes.
Really helpful. Thank you Sir.
MBS had a rating as well. IDK what your talking about.
Here is the catch. the rating company could be involved in the CDO's like moody. they give it higher rating then it should. that way it allows the pension fund manager to invest in this unregulated S.P.E.
I think thats why fanny and freddie have 3 trillion in real estate foreclosures still unsold on there books. they would collapse the market to its true level if they put them up for sale. so its allowing the senior to get paid first then it goes up for auction.
Than
Their
You're Awesome 👌
SAL IS THE GOAT
so how time trench is different from collaterlized debt obligation ?
So what you're telling me that CDOs are still being traded but under the 'tranche' name?
Can anyone tell me what ultimately happens to wealth in a default? Does it just vanish, or is it ALWAYS recycled in some form or fashion?
not sure what you mean by a "tranche" name, but CDO is just a generalized term for the security. Yes, structured finance is a big market and still is created and trade all the time... they're backed by things like credit cards, auto loans, mortgages, whole businesses, could go on. There's been more regulation but they have good return profiles.
Depends what the default is... a mortgage defaulting can have recoveries after the house is sold on the market. There are certain instances where the issuer goes through a default, and these securities are bankruptcy remote vehicles so the collateral stays with the security. In that case, payments get made sequentially down the waterfall, and if you don't get your principal back in the investment, its just a loss. Its a risk you're willing to make when you purchase the bond. There is, however, a lot of litigation going on over the mortgage backed securities due to fraud which paid back money to investors
@@ethanrubin2380 Bespoke Tranche Opportunity
not really... tranche is just the name for the specific bond an SPV offers. in the event that an underlying asset backing a CDO or other securitized product goes into default, it is liquidated, and the resulting principal is returned to investors and the tranche experiences a write down wherein the note is amortized more quickly than it would be otherwise. The idea of it being "recycled" to form CDOs is somewhat true, but movies like the big short overplay how much it happened. At most, ~10% of the market was made of CDOs, and probably far fewer were ABS CDOs (or CDO^2s as the movie calls them) See here (en.wikipedia.org/wiki/Subprime_mortgage_crisis#/media/File:Securitization_Market_Activity.png). In reality, if a bank were unable to sell a tranche in a given deal, they would typically hold onto it and assume the risk themselves else offset the risk with other credit derivatives.
that would be owned
excellent presentation!
Thankyou ...!
This isn't a CDO. CDOs are when you take the bad debt and create a layered security which is rated triple A in parts. Here Khan has just described a Tranched MBS.
+Tadhg Muircheartaigh I think you are thinking of a CDO squared which takes the junior tranche of a CDO and breaks that into tranches where the senior tranche becomes AAA. This is definitely a CDO.
can an individual interested in investing hire a ratings agency?
thanks.
man do videos on USABO.....
Holders of Equity "get played" Haha. Alarmingly accurate Freudian slip!
I heard 'get laid' but ok
@@KazakhToon he said get played...but it's actually also accurate because they basically did get played LOL
how is this separation into tranches ANY different than creating 3 individuals MBSs?
different returns, senior tranches have credit support of the tranches below them. It depends on your risk appetite and one security that is carved into tranches can satisfy different investors with different risk/return profiles
In CDO's every tranche is rated separately, whereas all Mortgage Backed Securities are rated the same. Hence CDOs cater to more investors, both risky and safer ones
its all like in a movie "the inside job"
Bunch of crooks new they will be bailed out by the taxpayers
동영상에 있는 상당히 불쾌한 이미지
wat
Speak slowly
ever heard of video speed control option?
Think quickly.
3:08 Hmmm, you sure you needed to correct yourself there Sal? Lullll
Me
that would be owned