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1. CDOS, CDS,THE SUBPRIME CRISIS AND IRELAND, 2007-2009 Dr
Stephen Kinsella [email protected]
www.stephenkinsella.net
2. LAST TIME Financial Fragility in Ireland Corporate
Governance lacking, nancial innovations disrupt normal running of
markets.
3. MINSKY WAS RIGHT.
4. MOVING L17-L18
5. TODAY CDO + CDS, Denitions & Examples. How do they
relate to Ireland today?
6. Deni- Securitization is the process of packaging (illiquid)
liabilities and debt instruments, thus converting them tion into
liquid tradable asset-backed securities.
7. BASIC STRUCTURE The bank The SPV sells a issues portfolio of
bonds loans Special Purpose Investors Bank Vehicle (SPV) Payment
for Proceeds loan from the portfolio issue
8. Central Bank policies (next week) Interest rate policies and
regimes. Funding cost changes. Exchange Rate policies. Models,
Pricing knowledge, fast and accurate calculation of Greeks, Hedging
ability Leads to innovations in structured credit markets
9. What is a structured Credit asset ? Reasons for using
structured assets Anatomy of a structured asset CLE CDO Examples --
Pricing and sensitivity
10. A structured asset is, at the end an asset incorporating a
derivative strategy. But this notion gets broader in Credit The
notion of correlated events become central
11. Individual Credit Risk: Credit Exposures by tranches T R
Super A Portfolio Senior N of N Credit C Exposures AAA H To Be I
Mezzanines Covered N Equity G
12. A COLLATERALIZED DEBT OBLIGATION (CDO) IS A STRUCTURED
PRODUCT WHERE A portfolio of securities is transferred to a SPV SPV
issues tranches of notes with different seniority and there is also
an equity stub The CDO tranches are rated based on portfolio credit
quality, portfolio diversication, and subordination. Single
tranchebespoke CDO/CDO-squared
13. LIABILITIES ASSETS Reference Portfolio Super Senior +25 ABS
[83%] (3.32% each) +3 CDO Tranches [17%] (5.6% each) ABS Bucket
RMBS [60.00%] Senior AAA Credit Cards [12.00]% [2.48]% ? ABS
[12.00]% Consumer Credit [8.00]% Auto Loans [4.00]% Junior AAA
[0.99]% Student Loans ABS [4.00]% CDO Bucket AA [1.03]% Total
number investment grade Corporate Reference ? is 42% 100 names per
CDO Equity [1.36]% Portfolio average rating: A/BBB+ See
sifma.org
14. By reallocating the default probability CDO tranches can
generate returns of 15-20% from very small default probabilities
But, more importantly they generate assets with different
sensitivities to (default) correlation
15. Buy Equity tranche Sell Mezzanine tranche. The effects of
default probability will cancel out. And the correlation effect can
be isolated. This can be traded.
16. Innovation is essential to make money and structured
products are a major way of doing this.
17. CDS Credit default swap (CDS) market is a large and
fast-growing market that allows investors to trade credit risk.
Credit default swap (CDS) is a contract between two parties, where
a protection buyer pays a premium to the protection seller in
exchange for a payment if a credit event occurs to a reference
entity. CDS are customizable, over-the-counter products and can be
written to trigger in the event of bankruptcy, default, failure to
pay, restructuring, or any other credit event of the reference
entity.
18. IRELAND & THE GLOBAL QUESTION
19. NEXT TIME The European Central Bank & Investor
Behaviour. Reading: Buiter, W: Why the United Kingdom Should Join
the Eurozone.