Praise for Structured Finance & Collateralized Debt Obligations Second Edition"Janet Tavakoli warned the world this disaster was coming well in advance. Now she explains it again for those who did not listen before as well as why it is not over yet. You need to read this book to understand the biggest credit bubble in world history."
—Jim Rogers, author of A Bull in China, Hot Commodities, Adventure Capitalist, and Investment Biker
"Janet Tavakoli's new book provides an insider view into the opaque world of structured finance and collateralized debt obligations. With its clear explanations of numerous structured-finance innovations, I expect this book to become the 'Rosetta Stone' for deciphering these markets. This book is a service to the investment community."
—Hilary Till, Cofounder, Premia Capital Management, LLC
"Janet Tavakoli explains the complex world of structured finance with unusual flair and colorful anecdotes from securitization's front lines. An indispensable and up-to-date guide for anyone seeking greater understanding of the CDO market."
—Charles C. Henneman, CFA, Head, Educational Programs and Events, CFA Institute
"Janet Tavakoli has been able to dissect, with a brisk style, the intricacies of many structured products. Not only does she explain in a clear and insightful manner how certain things work, but more important, why others do not work!"
—Arturo Cifuentes, PhD, Managing Director, R.W. Pressprich & Co.
"Stan O'Neal, Marcus Ospel, and more than a few other bold-face names in finance might still have jobs if they'd taken the trouble to read this book. Janet Tavakoli takes the complexities of today's derivatives markets and makes them both comprehensible and digestible for everybody from the practitioner to the interested observer."
—Greg Newton, Founding Publisher, MAR/Hedge
"Janet Tavakoli is exceptional in having worked extensively both in mortgage securitization and structured credit at major financial institutions. In this clearly written book, she shares her in-depth knowledge of structuring, valuation, and risk management of structured products. This book is a must read for regulators and risk managers to keep up with the latest developments in structured finance."
—Joseph Masri, PhD, Barclays Global Investors, Regional Director, Professional Risk Managers' International Association (PRMIA)
Preface.
Acronym Key.
Chapter 1. Securitization Terminology.
Simplified Cash CDO.
The CDO “Arbitrage”.
Chapter 2. Structured Finance and Special Purpuse Entities.
SPCs and Historical Abuse.
SPEs and SPVs.
Documentation.
SetUp Costs.
Example of a Multiple Issuance Entity (MIE).
Cayman Domiciled SPEs.
Repackagings to Satisfy Investor Demand.
CLNs and Funding Costs.
Structured Floaters.
Principal Protected Notes (PPNs).
Loan Repackagings.
Liquidity.
Mismatched Maturities.
Unwind Triggers Linked to Derivatives Transactions.
DAX-Linked Note with Triggers.
Ratings.
Master Trusts.
Owner Trusts.
Grantor Trusts.
Real Estate Mortgage Investment Conduits (REMICs).
Multiseller and Single Seller Conduits.
Domestically Domiciled Corporations.
Bankruptcy Remote?
Enron, J.P. Morgan chase, and Sureties.
Chapter 3. Credit Derivatives & Total Rate of Return Swaps.
Risk to Portfolio Value.
Credit Derivatives and Credit Default Swaps (CDS).
Negotiated Language.
Basis Risk: Persistent CDS Language Issues.
Physical Settlement and Cash Settlement NEGOTIATIONS.
Digital, Binary, Zero-One, or All-or-Nothing Cash Settlement.
Initial Value x (Par ─ Market Value).
Normalized Price Method – Alternate Termination Payment.
Hedge Costs in Cash and Synthetic CDOs.
Deliverables: CDOs and the “Cheapest to Deliver” Option.
Convertible Bonds and Asset Swaps.
Negative Basis Trades.
Default and Recovery Rate.
The Default Protection Seller: counterparty Credit and Correlation.
Default Language for Sovereign Debt.
Default Language for Non-Sovereign Debt: Controversy and CDOs.
CDS Pricing Issues.
Synthetic CDOs.
Total Rate of Return Swaps (Total Return Swaps).
Pricing TrORS on Levered CDO Tranches.
TRORS versus Repos.
Equity TRORS: CORPORATE Loans Disguised as Capital Injections.
Information Asymmetry and Moral Hazard.
CDS vs TRORS.
Pay-As-You-Go (PAUG).
Indexes.
Chapter 4. CDOs and the Global Capital Markets.
Evolution of the CDO Market.
Chapter 5. Risk and Valuation Issues.
The Portfolio Diversification Myth.
Modern Portfolio Theory: Bane of CDOs.
Abnormal is Normal.
Mark-to-Market Hazard.
Cash Flow Hazard.
Global Derivatives Risk.
Loans and Leveraged Loans.
The Leverage Paradox.
New Structured Finance Deals.
Fraud.
Hedge Funds: A New Investor Class.
Hedge Funds, CDOs and the Great Unwind.
Brain Damage Theory.
Dead Man's Curve and Leveraged Funds.
Margin of Safety v. One-Sided Illiquid Leveraged Bets.
Chapter 6. Early CDO Technology.
True Sale Hybrid, and Synthetic Structures.
Credit Enhancement.
Monoline and Multi-Line Insurance.
CDO Classification.
Market Value CDOs.
Cash Flow CDOs.
The Origins of U.S. Securitization.
Collateralized Mortgage Obligations (CMO).
Chapter 7. Early Warning Commercial Financial Services.
Rating Agencies' Failed Models.
Anatomy of A Flawed Process.
Terminology.
Early Red Flags.
CFs Gets “Creative”.
Selling Out the Future.
Ignoring an Audit Report.
Lessons to Be Learned.
Fallout from CFS's Bankruptcy.
Chapter 8. Subprime and Alt-A Mortgages: Collateral Damage.
Thruthiness in Lending and Borrowing.
The Predators Fall.
Classic Ponzi Scheme.
Portfolio Risk.
The Risk Managers' Dillemma.
How to Create A Securitization Disaster.
Models Versus Common Sense.
Lack of Appropriate Due Diligence and/or Disclosure.
Investors and Ratings.
Hedge Funds and ABX Indices: Alpha Bets.
A Good Year (for Some).
BSAM's Hedge Funds Undone by Leverage.
Bear Stearns' Hedge Fund Lenders' Bailout.
Disclosure: Investor Fallout from the Mortgage Debacle.
“The First Thing We Do, Let's Kill All the Lawyers”.
Market Fallout from the Mortgage Debacle.
Redlining and Red Ink.
Chapter 9. Cash versus Synthetic Arbitrage CDOs.
Comparison of Managed Arbitrage CDO Features: Cash versus Synthetic Deals.
The Arranger and the Manager.
Mandate Agreement.
Deal Assembly.
CDS Language for the Synthetic CDO.
Selecting the Portfolio and Impact on Rating.
Rating Criteria and Restrictions.
Substitution and Reinvestment Criteria.
Warehousing Assets.
Pricing and Closing.
Ramping up the Portfolio.
Reinvestment Period.
Non-Call Period.
Paydown Period.
Weighted Average Life and Expected Final Maturity.
Early Termination.
Legal Final Maturity.
Tranching and the Synthetic Arbitrage Advantage.
Waterfalls for Cash versus Synthetic Arbitage CDOs.
Payment-in-Kind (“PIK”) Tranches.
Psychic Ratings: Rating Agency Treatment of PIK Tranches.
The Super Senior Advantage.
CDS versus Cash Asset Spreads.
Simplified Examples of Interest Rate Swaps and Asset Swaps.
Hedging the CDO Portfolio Cash Flows.
Settlement in Event of Default or Credit Event.
Documentation.
Cash versus Synthetic Arbitrage CDO Equity Cash Flows.
Sample Cash Flows.
Summary of Cash Arbitrage CDOs versus Synthetic Arbitrage CDOs.
Chapter 10. CDO Equity Structures.
Accruing Errors.
Probability of Receipt.
The Best and Worst Equity Investments.
The “Best” Equity Earns All Residuals.
Equity Investor Injects Cash as Overcollateralization.
Rated Equity Earns Stated Coupon Appropriate to Rating.
Rated Equity: Static Deal.
Equity Investor Earns a Stated Coupon on the Remaining Equity Investment.
Moral Hazard and Conflict of Interest.
Leveraging the Best: Unfunded Equity Investments – Ultimate Leverage.
Actively Traded and Limited Substitution Synthetic Arbitrage CDOs.
Interest Subparticipations (ISPs): When Equity isn't First Loss.
Participation Notes (PNs).
Capped Participation Notes.
Combination Notes (CNs).
Investor Motivation.
Principal Protected Structures.
First (and nth) – to - Default Basket Swaps.
First-to-Default Notes.
The Smartest Equity Investment: Protection money.
Chapter 11. CDO Managers.
Best Practices.
The Valued Few.
Chapter 12. Balance Sheet CLOs and CDOs.
True Sale (“Fully Funded”): Delinked Structure.
Linked Non-Synthetic Structures.
Linked Black Box CLN CDOs.
Synthetic Structure with SPE (BISTRO).
Partially Synthetic Linked CDOs.
Fully Synthetic CDOs.
Small to Medium-Size Enterprises (SMEs) – Europe.
SMEs: U.S. versus Europe.
Secured Loan Trusts.
Bank Regulatory Capital and BIS II.
Chapter 13. Super Senior Sophistry.
Cash Flow Magic Trick.
Rating Agencies – Moody's Tranching.
The “AAA” Disappearing Act.
Rating Agencies and Ratings Shopping.
“Triple-A” Basket with 2 0.000000irst-Loss Tranche.
Super Senior Attachment Point.
Super Senior Pricing.
Super Seniors or Senile Seniors?
Where are the Regulators?
Junior Super Seniors.
Super Senior “Investors”.
Negative Basis Trades.
Leveraged Super Seniors (LSS) and Constant Proportion Portfolio Insurance (CPPI).
Final Thoughts on Super Seniors.
Chapter 14. Synthetics and Mark-to-Market Issues.
Synthetic Cash Windfall.
Synthetic Equity.
Portfolio Swaps.
Bespoke Tranches: Single Tranche CDOs (STCDO).
Short Mezzanine & Long Equity.
Bank' Invisible Hedge Funds.
Extraordinary Popular Delusions and the Madness of Correlation.
Delta Hedges, Correlation Models and Junk Science.
Synthetic Notional and Actual Risk.
Explosive Growth.
Found Money and Moral Hazard.
Chapter 15. Comments On Selected Structured Finance Products.
Multisector CDOs: CDOsN.
Future Flows: Payment Rights Securitizations.
Emerging Market Caveats.
CPDOs and Rating Agencies.
Constant Proportion Portfolio Insurance – CPPI.
Multiline Insurance Products: Disappointment and Promise.
Hollywood Funding.
Transformers.
SEC Gaslight on Life Settlements.
Special Purpose Acquisition Companies (SPACs).
Chapter 16. Credit Funds.
Credit Hedge Funds.
Hedge Funds and Structured Credit.
IO and PO Tranches: Junior Tranches and Equity OIDs.
Limited Purpose Finance Corporations (LPFCs).
Structured Investment Vehicles (SIVs).
Credit Derivative Product Companies (CPDCs).
Hedge Funds and Collateralized Fund Obligations (CFOs).
Chapter 17. The Credit Crunch and CDOs.
Rating Agencies, Regulators, and Junk Science.
Savvy Investors Ignore “Ratings”.
Misfortune's Formula: Structured Credit Ratings.
ABCP Crisis and MLEC.
Constellation CDOs: Falling Stars.
New Flawed Models Replace Old Flawed Models.
Rating Agencies in Crisis.
Monoline Meltdown: Financial Guarantors in Crisis.
Rating Agencies in Denial.
Overwhelming Losses.
Poor Actual Recoveries.
Undercapitalized Financial Guarantors.
Dicey Deals Done Dirt Cheap.
Competitive Pressure.
Uncertain Future.
Countrywide's Bailout and Moral Hazard.
Chapter 18. Future Developments in Structured Finance.
Regulatory Failure: Investors are on Their Own.
Appendix A. Interesting Web Sites (Prefixed by http://www.).
Bibliography.
Index.