CDO, CDS, Sub-Prime

Artikel menarik mengenai CDO, CDS.

“Well, What Do You Want It To Be?”

Today I will follow a debt trail, from loan origination all the way to its ultimate existence as part of a credit derivative product. I will use a sup-prime mortgage loan as an example, but any debt obligation will do. Keep the question of the title in mind, it will make sense in the end.

Let’s start two years ago with Ron and Ronda White, a couple in their early 30’s with a combined income of $60.000 who have their eyes set on a $300.000 house to call home. They have saved only $5.000 to put down, which barely covers the closing costs. Their mortgage broker talks them into a $250.000 first mortgage ARM with an initial 2-year teaser rate of 2% rising to prime+1% thereafter and a $50.000 second, 30-year fixed at a whopping 10.5%. Despite the obvious problems apparent right from the start, such loans were made to hundreds of thousands of people. But no matter…

The two loans were immediately sold to investment bank XYZ who pooled them with other loans (creating Residential Mortgage Backed Security, or RMBS) and placed them inside a CDO. Using recent default data, the financial engineer employed by XYZ took 90% of the White’s outstanding mortgage amount and placed it in CDO Tranch A, the supposedly safest portion rated AAA and paying 0.10% more than other AAA straight corporate bonds. The rest was apportioned 7% to Tranch B rated BBB, paying 1.5% more than equivalent bonds and the remaining 3% to Tranche C, also known as the “equity” tranche, which was unrated and paying 10% above Treasury bonds. In case of default, Tranche C gets hit first until it is exhausted, then Tranche B and, finally, Tranche A. This is a “cascade” or “waterfall” pattern, common to all such collateralized products. Continue reading


Saham, Growth dan P/E (3)

Banyak yang bertanya berapa P/E yang wajar dari suatu saham? Jawaban saya adalah ….. tergantung. Tergantung jika asumsi-asumsi dalam perhitungan P/E semuanya terpenuhi. Ada deviasi sedikit dari asumsi yang dibuat, nilai P/E yang wajar bisa saja jauh berubah. Untuk lebih jelasnya mari kita lihat salah satu rumus P/E – dalam hal ini saya menggunakan versi Damadoran (lihat buku Investment Valuation – Aswath Damadoran). Continue reading

Riding Out The Volatile Market

This was an article on Jakarta Post – August 30, 2007 edition, or about a month ago, printed under a slightly different title (edited by the newspaper editor, though I like the above title better).

Riding Out The Volatile Market

The recent equity market turmoil triggered by problems in the U.S. sub-prime lending activities saddled many investors with either substantial losses or much reduced investment profits. In the midst of great market uncertainty, knowing what to do next with your equity investment portfolio can be critical to its health. Continue reading

Treasury Bonds dan Dow Futures Pre-Fed

Two hours into trading, 10 year Treasury Futures gap down (yield up), sedangkan Dow Jones Futures gap up. Both – not yet filled di awal trading ini. Interesting! Continue reading

Snake-Bit dan Reksadana Pendapatan Tetap (Fixed Income)

Setelah mengalami kerugian di investasi instrumen tertentu, biasanya dikemudian hari investor akan menghindari instrumen tersebut, menganggap instrumen tersebut beresiko tinggi.

Hal ini menurut teori behavioral finance disebut sebagai snake-bit effect (dampak gigitan ular). Continue reading

Hedge-Fund Guy Atones for His Subprime Bond Sins: Mark Gilbert

Nice joke from Bloomberg.

2007-08-15 19:34 (New York)

Commentary by Mark Gilbert
     Aug. 16 (Bloomberg) -- Dear investor, we'd like to take this
opportunity to update you on the recent performance of our hedge
fund, Short-Term Capital Mismanagement LLP. Continue reading 

Emerging Market Bonds : Indo 37 Pain

This past 2 weeks, many emerging market bond traders got clobbered for holding long Indo-37 bond (Indonesian US Dollar government bond maturing in 20 years) positions. Continue reading