Collateralized debt obligation (CDO) | Finance & Capital Markets | Khan Academy
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- Опубліковано 31 сер 2007
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Introduction to collateralized debt obligations (to be listened to after series on mortgage-backed securities. Created by Sal Khan).
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Pretty eerie this video was pre crisis
vettefever67 totally creepy, thats right
Asset Backed Security (or ABS) is the most general term that would cover all of the above (including MBSs)
but u said they bought the shares for 1,100 dollars so wouldn't a 10% interest be 1,100 dollars instead of a 1,000 dollars
HE KNEW IT WAS COMING
Yup
By 2007 what was happening was already widely known. The public crisis was 08. I was finishing up college and the nerdy over-achieving finance students had been crying housing bubble since 2005-2006. The pool of risk since then has just shifted and the next crisis will happen the same way.
I just watched The Big Short, and then these videos(CDS, MBS, CDO), and man, it's MAKES A LOT MORE SENSE now.
ANDDD, to see that this was posted on '07!! XO. Ufff.
I bet people are watching this video just after watching "The Big Short"
+Shreshtee Yadav you bet :D
+Shreshtee Yadav Exactly , its like your Psychic
+mbero akoko Thanks and I can relate bcoz I did the same !! btw great movie
+Shreshtee Yadav WOW !how do you know!
i am watching to prepare for my paper tomorrow :/
Love this 3 part serie on the subprimes, I come back here every few years to refresh my memory.
And take a shot everytime Sal says "My pen is...." or "Where's my pen... ?" ^^
mate these are some of the most helpful videos I have ever found on youtube. I spent a collective total of nearly £30 on books to do with this recently, and these free videos have explained it all 10 times better than any of those books ever did. Thanks!
RIGHT BEFORE THE FINANCIAL MELTDOWN GOOD JOB!
Wow, thanks for this four-part series! Really helped me understand what's going on right now.
how much money did you lose
Had no investments, so lost nothing.
@@tompaah7503 Welcome back haha
Thank you so much for this series. I am working with an MBS client and needed a crash course-- can't even tell you how much this helped! All the best.
I wanted for the longest to understand these things without having to read an exhaustive tome using arcane financial terminology. You made it easy. Keep up the good work and make more videos on other esoteric financial instruments and mathematical ideas.
Thanks for these videos. Super helpful and really well explained!!
Thank you for this video!!! It was very helpful!
Great job but I think your math is a little off your equity return should be 18.3% instead of 16.5%
Hahah agreed
great Job.!!! Would love to see more videos on other financial instruments.
Thank you very much for concepts...
Wow you made me understand these ABS and CDO things that drives me mad reading in my studies, thanks for the simple explanations!
This is a very good presentation which gives fair idea about CDO. I wish this sort of presentaion for other fixed Income products is being posted by the presenter.
legit best finance education right here
no in my opinion this casual presentation was really good in terms of conveying a better understanding of the topic, thank you sir
Didn't realize until the end that this was before the 08 crisis. Very helpful video. thank you
Excellent Tutorial. Thanks
I havent seen many better videos.. Folks like Khanacademy and Bionicturtle are just too good.. thank you guys!
very well explained, thanks !
Great learning tool! Top notch.
Thank You for the video! I just have one question: are the individual investors investing their money/shares into companies like a hedge fund, who then would invest that money into buying MBS? Thank You
Nicely presented. The 'caveman' drawings in the videos really worked for me on understanding repos, mbs and cdos.
This is beautiful and genius!
it really help! thanks a lot!
Very good video, thank you!
This channel is a diamond among rocks
Very easy to understand. Top marks. I have a question: What would the specific term be for the credit card (or auto loan) equivalent of an MBS?
Wonderful videos man thank :)
good job! thanks!
Superb explanation......
so in your Equity tranche in this video, basically the crappy loans that default are affecting that portion of the tranche first? meaning the defualt rates are rising in theory and the next highest rated tranche takes the next hit also being a safety for the next highest rated tranche....if im following right
Loved it
this is amazing :)
wow!! that was great!!
You are the man!!
THANK YOU
Really good presentation. So, the bottom line is the CDO is actually the SPE ?
great info bro peace.
Sal and his pen: still a better love story than Twilight!
very good teaching
@ThyHolyHandgrenade (For this particular example) I understood it as follows: if enough people default on their loans such that the overall return on the 1 billion dollars is under 45 million dollars, returns of the mez tranche start to diminish (and equity investors get no return). And then to take it one step further, if the overall return goes below 21m then senior class returns start to dimish (and both equity and mez tranches get no return)
I'm pretty sure CDOs are not derivatives. CDOs are simply ABSs with defined tranches ranked by seniority.
If you have a total return swap on a CDO portfolio, now that's a derivative.
Can you please make a video explain a Escrow account shortage
@landwarrior82
Oh i meant the Special Purpose Entities. When do the investors get the principle back on the CDO's they bought? Thanks
so every mortgage-backed security video should have said that the structure is this so it wouldnt confuse people... also when it is a mortgage its called a CMO. There were subprime, alt-a, option arm, and prime collateral securities.
I think what everyone wants to know is what truly would be the CDOs that were really derivative products that really made investors lose tons of money. Basically, the issuer would sell a CMO in the structure that is similar to the video (there are wayyy more tranches in these securities). The senior tranches would sell, but they had trouble selling off the mezzanine portions. To get these securities off their books, issuers would package up thousands of the mezzanine tranches and then "re-tranche" this debt into a new senior/subordinate structure. What is baffling was the rating agencies said these were all investment grade. So, these "senior" AAA rated bonds were actually backed by "mezzanine" tranches that were shit, who's priority of payment, if a sequential pay, was last and were the first to be written up and take losses. Therefore, investors bought this senior debt for par and literally got wiped out and usually never saw a dime in principal payments!
There were some absolutely crazy CDO's made back then that literally just had random collateral, but collateral backed securities are an integral part of the financial system and really important. Now, issuers must have skin in the game and retain either a vertical or horizontal 5% slice of the security. Asset backed securities still exist and give good returns, and are created in a way that investors have more protection against losses.
Ethan Rubin Can someone please clarify- when banks sell these CDOs- do banks have to repay back this purchase price back to the investors in future? Is this a situation of debt against debt?
Where can I invest in howards stern newlly anticipated anual rings?
Does anyone know, which video the following part is of " Collateralized Debt Obligation (CDO)" ??????
Can someone please clarify- when banks sell these CDOs- do banks have to repay back this purchase price back to the investors in future? Is this a situation of debt against debt?
Could you cover SIV's and the new plan brought up by the 3 largest banks to supposedly bring stability to the credit markets?
Okay I've got a question:
Under the assumption that this is an interest only loan, there will be a payment of $1billion at the end of the ten years. Otherwise the borrowers wouldn't pay any interest.You said that if 20% of the borrowers default with a recovery rate of 50%, there will be a yearly payment of $90m. At which point do the borrowers default in your scenario? I can't imagine a case in which there would be a yearly payment of $90m and a full payback of the $1 billion.
awesom
One question: At 6:37, when you are explaining the Mezzanine tranche, why do they get 21 Million each year, instead of more? I thought the senior tranche was 6%, then, on a per year basis, they should get less than the Mezzanine tranche, not more. I understand, how the numbers are computed, but I don't get intuition behind them. Thanks!
Nobody else has spoken up, so I'll make a guess. When you invest in an "insurance pool" (by which I mean a pool of money used to share risk), you are helping to increase the number of loans that the pool can lend out. That spreads the risk out even more and lowers your risk.
Normally, this is a really small change in the risk. However, FNMA steps in if a borrower defaults. The risk is much smaller to start out with, so your contribution actually matters.
@Mr khan it would be better to make video on MBO vs CDO
Because the originating local bank has no risk in the mortgage after it sells it to the investment bank, the local banks gave mortgages to high risk borrowers, flooding the system with worthless paper.
Ok so it's different from what Anthony Bourdain described as CDO? The chef said CDO was something made up to sell nonperforming loans while here it was meant to make the gamble more interesting?
@john5927572 what do u mean by SPO? There r lots of products which banks offer. And principal payment is subject to the type of products they offer.
I see where you are going. If we didn't have the profession of economics, the world would still spin, people would still buy and sell. Economics is just a way of creating models of how we should that. The more clever you are in creating those models, the more advantage for your employer or special interest has. Money is a useful term, however, it is a creation of man. It can be anything we want it to be. Some very clever people have convinced us with models that our current system is best.
I have a question, you said when they default such that the loan loses 50% of its value, the return for the top tronch goes to 0%. But what about the principle...doesn't that drop to 500 million as well? What are the losses there?
you saved my day! great explanation.. but i think you need a new pen =) thanks!
that's one happy mother @#$%@# you wrote down at 2:04.. he looks like the happiest man alive
so essentially the I-bank is transferring the risk (whether those homeowners are able to pay off their mortgages) to the shareholders?
but in this case, if all the interests from the homeowners are given to shareholders in dividends, the bank gets nothing? unless...it earns its profits solely through selling its company's stock???
Shouldn't the return to the Equity tranche be 18%?
Ajinkya Kokandakar
18.3%
Yes
@@MrMuskaaan1 Agreed. It should be 18.33%. I guess it was a typo error
that damn pen!
Can someone help me. So how exactly are the banks not losing money if they are paying all these interests out? Where is the bank making it's profit? Do the interest rates the borrowers pay make up for what the banks have to pay to all the investors who purchase the CDOs?
Great video though
I have a question. How could the investors know the real default rate? Could the investment bank just makes the default rate higher and get the real return from the equity security holders?
For the first question: A well-known association called Public Securities Association
has benchmarks called Standard default assumption (SDA) and Standard Prepayment Benchmark for
investors to verify those rates.
For the second question: Logically it makes no sense for IB’s to increase the default
rate, they will just create more trouble for them.
@landwarrior82
Oh ok yea i see now. How would the investors get their principle back though because I mean the SPO's are paying them a certain percentage every year on the money they invested but how do they receive their principle back?
Thanks for the help.
@KoalaBearWarrior There are 400k shares of senor and only 300k of mezzanine. Because of each share being 1k Senor has 400m and Mez has 300m total. So with the interest rates given mez is getting 21m and senor is getting 24m. The reason mez is gaing more is because they have that 21m gain split amongst 300k shares instead of 400k. So mez would gain more per share but less total because of the total amount of shares of mez being lower.
The sole reason for transactions, which results in cash flowing, is to create value in society. These money games create too much transactions for little net value creation.
@smokenfly514
imagine there is a market where u can trade the MBS like a general share on the exchange market. For example...the demand for the MBS is high, the price will increase.But if the supply is high (higher than the demand, the price (value) will decrease. This is how the price or value of the securities can increase or decrease
@ABCInfinit3 I can't believe I overlooked that! Thanks man! Looks like we're helping each other out on different vids :)
@jmk1a1 cattle go and look where they are directed
"tranche" is a french word meaning slice.
finance is so much easy. wish i had someone explain this 20 yrs ago and i wud surely have made a career in finance. btw i feel its not a bad idea to choose an equity tranche as long as the mortgages are not sub prime
Want to hug you and kiss you.. the explanation was lucid AF..😘😘
I'm confused about one thing. He says the money from the investors who bought the shares is what gave the money to the SPE in order to loan it out to the home buyers, but I thought the loans had already been made by the bank who sold them to the investment bank?? I'm confused there. Isn't it that once the loans were bought, the debts owed on those loans were merely transferred to a different entity, but had still nevertheless been made prior to the fact?
Or was he speaking merely of those that were foreclosed and resold?
+51MontyPython I think in this lesson he was emphasizing more on the direction of flow of the funds instead of the order in which they flow.. i was a little confused about that too, but then i guess for now we finance learners just learn the theory well. also he might just have been simplifying the whole process and skipping the intermediaries in attempts to help us see the big picture.
+TheEechee hmm, that actually does make sense. Thanks for the reply.
Here are the steps how a mortgage gets into the hands of ordinary investors. At least from what I know.
1. Tony asks a Mortgage broker to find a bank that is willing to loan him $1m on a house.
2. Mortgage broker finds a bank and gets him this loan that's under Tony's name.
3. The bank has now loaned some of its capital ($1m) to Tony in return for 10% annual interest rate.
4. The bank sells this mortgage to investors by creating a Special Purpose Entity which will find investors.
5. Now the investors legally own Tony's mortgage through the SPE and will receive the 10% returns from Tony's payments and other 100s of mortgages. The banks no longer own the mortgage and now have more money to loan out to more people.
6. The SPE handles the operations of which investors get what money based on what tranche they're in, as explained in the video. If people default on their loans the riskier investors lose money.
?. I'm not sure what happens when people default on their mortgage. The investors technically own the house until the owner has fully paid off their debt. So if the owner defaults, the investor owns the house. But since 100s or maybe 1000s investors own it, it has to be sold some way. I assume the SPE tries to sell the house back to a bank.
If the owner defaults on the mortgage, he is evicted and the investor tries to sell the house straight on the market. But what happened in the 2007 financial crisis was that there were too many houses on the market from sub prime mortgage defaults, hence low prices and no buyers.
I am confused about the difference between MBO and CDO
Irl foreshadowing is a thing.
So basically the house pricing will go down (sooner or later) because of coronavirus is hurting people’s income and they cannot pay their mortgage so defaults occur.
Let's suppose the mortgages are second mortgages for slum property in Detroit. And let's suppose no one is living in those properties either. Or maybe these are New Orleans slum properties. How does that affect your calculations?
Basically, it's big investment firms legally gambling on us paying our mortgages hidden by financial jargon.
+MrPlTA rather than insulting, i would recommend listen to the lecture.
+Andreas Wagner He's not insulting. This video was made before the economic collapse of 2008. I'm sure the author himself didn't even know that was coming.
I was really hoping that Leonardo DiCaprio would explain all of this shit in The Wolf of Wall Street. ***sigh***
Watch Margin Call. Has some of these interesting things.
+Brandon Daniels watch the big short
+Andile Mathebula Margin Call is dog shit. Instead watch Too Big to Fail or The Big Short.
@jmk1a1 I think thats bcoz one doesnt have to use his or her brain to understand Lil waynes rap. No thinkin required, so no effort. Whereas, here you have to put in effort to concentrate, think and understand and thats not everyones cup of tea.
The reason everyone isn't an equity invenstor is because Sal's pen isn't working
I thought calculus when he said derivative
One function can be derived from another function. One security can be derived an underling one.
Cos they're not allowed to "gamble" directly, so they invest in this type of company and keep themselves firewalled, in theory [ha].
That's why rich and successful people are less than 2% of the world population.
As someone who has followed Sal's videos from Trig right up to current Calculus class (and these videos as an aside to current events), I'm going to say anyone who doubts his "veracity" or "professionalism" is merely doing so to get a dig in on a Friday night.
Where is Jack Lemon in all of this?
OK so I saw all your videos up to this one so far and I understand them all. This question may seem silly but here it is. IF Collateralized Debt Obligation is simply a Mortgage-Backed Security (or asset backed security) organized to provide different returns for different levels of risk, THEN why such a drastic name change. Shouldn't they have named them something like Risk Adjusted Mortgage Backed Securities? Or why change the name at all? Did they evolve separately or something?
I wish you get a better pen
"greed was good, now it's legal" right??
Exactly where did this collection of "collective borrowers" come from? That statment is misleading. Where in the mortgage contract, that each individually signed, does it say that they agree to CONVERT their INDIVIDUAL promise to pay into a collection of co-obligators to pay? My mortgage gives a "right to tranfer" NOT a right to convert it into something else.
Thanks for exposing what seems like the BIGGEST FRAUD SINCE THE DISCOVERY FIRE.
It is, the investment banks are on the top.
Im kidding. (sorta)
No, it's not. Influx of cash comes from people paying their mortgages.
Nice, but get that pen sorted out. : )