How much of the original portfolio of subprime

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How much of the original portfolio of subprime mortgages is AAA?Why can we create so many AAA securities based on them?13ABSsABS CDO
Losses to AAA Tranche of ABS CDO (Table 6.1)Losses onSubprime portfoliosLosses on Mezzanine Tranche of ABSLosses on Equity Tranche of ABS CDOLosses on Mezzanine Tranche of ABS CDOLosses on SeniorTranche of ABS CDO10%25%100%100%0%15%50%100%100%33.3%20%75%100%100%66.7%25%100%100%100%100%14The senior tranche of ABS CDO is lessrisky than the mezzaninetranche of ABS when losses on subprime portfolios is lowWhen losses on subprime portfolios is high, losses on the senior tranche of ABS CDO is close to losses on the mezzanine tranche of ABSThis is exactly the case in 2008. Many banks have lost money investingin the senior tranche of ABS CDO (e.g. Merrill Lynch)
QuestionIf the loss of the subprime mortgage collateral pool is 12%, what is the senior tranche loss of the Mezz. CDO?15
A More Realistic Structure (Figure 6.5)Subprime MortgagesAAAAAABBBBB, NRSenior AAAJunior AAAAAABBBNRSenior AAAJunior AAAAAABBBNRSenior AAAJunior AAAAAABBBNR81%11%4%3%1%ABSHigh Grade ABS CDOMezz ABS CDOCDOof CDO62%14%8%6%6%4%88%5%3%2%1%1%60%27%4%3%3%2%16The whole idea is to create as many investment-graded tranches as possible.Investors in many of the tranches created will lose principal in situations where losses on the underlying subprime mortgage portfolios are moderately high
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