I buy a package of MBS, in which say me that the first three MBS are relatively good, the three seconds, very regular and three third parties, frankly bad. This means that I’ve structured the package of MBS in three tranches: the relatively good, very regular and very bad. 2. I agree to that if not paid anyone the very bad tranche (or as they say these gentlemen, if in the wrong section I incur in default), but charge something of the very regular tranche and enough of the relatively good, everything will go to pay the mortgages of the tranche relatively well, with that, automatically, this tranche will be rated AAA. 3 (7 Th comment: in the economic situation of the IESE, in January 2008, comments which I have taken most of what I’m saying, call you this financial magic) ii.
To finish rolling of San Quirze, these MBS sorted into tranches were re-baptised as CDO (Collateralized Debt Obligations, obligations of debt Colateralizada), as they could have taken another exotic name. III. not content with this, the financial wizards created another important product: the CDS (Credit Default Swaps) in this case, the purchaser, who bought the CDO It assumed a risk of default by the CDO that he bought, to charge more interest. So, he bought the CDO and said: if it fails, I lose money. If it fails, I charge more interest. iv.
Following inventions, created another instrument, the Synthetic CDO, which I failed to understand, but which gave a surprisingly high profitability. v. Even more: those who bought the Synthetic CDO could buy them through very cheap Bank loans. The differential between these interests very cheap and high yields of the Synthetic was extraordinarily profitable operation. To get here and trusting that you’ve not lost too, I want to remember one thing that it is possible that you have forgotten you, given the complexity of the operations described: that everything is based on the ninjas to pay their mortgages and that the U.S.