Structured Finance and Collateralized Debt Obligations: New Developments in Cash and Synthetic Securitization (Wiley Finance)

482 Pages·2008·5.25 MB·English

by  Janet M. Tavakoli

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Structured Finance
and Collateralized
Debt Obligations
New Developments in Cash and
Synthetic Securitization
Second Edition
JANET M. TAVAKOLI
John Wiley & Sons, Inc.
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Structured Finance
and Collateralized
Debt Obligations
i
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Structured Finance
and Collateralized
Debt Obligations
New Developments in Cash and
Synthetic Securitization
Second Edition
JANET M. TAVAKOLI
John Wiley & Sons, Inc.
iii
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Copyright(cid:1)C 2008byJanetM.Tavakoli.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
OriginallypublishedasCollateralizedDebtObligationsandStructuredFinance.
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LibraryofCongressCataloging-in-PublicationData:
Tavakoli,JanetM.
[Collateralizeddebtobligationsandstructuredfinance]
Structuredfinanceandcollateralizeddebtobligations:newdevelopmentsincash
andsyntheticsecuritization/JanetM.Tavakoli.—2nded.
p.cm.—(Wileyfinanceseries)
Originallypublishedin2003undertitle:Collateralizeddebtobligationsand
structuredfinance
Includesbibliographicalreferencesandindex.
ISBN978-0-470-28894-8(cloth)
1.Asset-backedfinancing—UnitedStates. 2.Mortgage-backed
securities—UnitedStates. I.Title.
HG4028.A84T382008
332.63(cid:2)2044—dc22
2008008483
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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Contents
Preface xiii
AcronymKey xix
CHAPTER1
SecuritizationTerminology 1
SimplifiedCashCDO 4
TheCDOArbitrage 5
CHAPTER2
StructuredFinanceandSpecialPurposeEntities 7
SPCsandHistoricalAbuse 10
SPEsandSPVs 16
Documentation 18
SetupCosts 19
ExampleofaMultipleIssuanceEntity 19
Cayman-DomiciledSPEs 22
RepackagingstoSatisfyInvestorDemand 24
Credit-LinkedNotesandFundingCosts 25
StructuredFloaters 27
Principal-ProtectedNotes 27
LoanRepackagings 28
Liquidity 29
MismatchedMaturities 29
UnwindTriggersLinkedtoDerivativesTransactions 30
DAX-LinkedNotewithTriggers 32
Ratings 34
MasterTrusts 34
OwnerTrusts 35
GrantorTrusts 36
RealEstateMortgageInvestmentConduits 36
MultisellerandSingle-SellerConduits 37
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vi CONTENTS
DomesticallyDomiciledCorporations 39
Bankruptcy-Remote? 40
Enron,JPMorganChase,andSureties 43
CHAPTER3
CreditDerivativesandTotalRateofReturnSwaps 45
RisktoPortfolioValue 45
CreditDerivativesandCreditDefaultSwaps 47
NegotiatedLanguage 49
BasisRisk:PersistentCDSLanguageIssues 49
PhysicalSettlementandCashSettlementNegotiations 50
Digital,Binary,Zero-One,All-or-Nothing,or
FixedRecoveryCashSettlement 52
InitialValue×(Par−MarketValue) 53
NormalizedPriceMethod—AlternateTerminationPayment 54
HedgeCostsinCashandSyntheticCDOs 55
Deliverables:CDOsandtheCheapest-to-DeliverOption 55
ConvertibleBondsandAssetSwaps 56
NegativeBasisTrades 62
DefaultandRecoveryRate 62
TheDefaultProtectionSeller:CounterpartyCredit
andCorrelation 65
DefaultLanguageforSovereignDebt 65
DefaultLanguageforNonsovereignDebt:Controversy
andCDOs 66
CDSPricingIssues 69
SyntheticCDOs 70
TotalRateofReturnSwaps(TotalReturnSwaps) 72
PricingTRORSonLeveredCDOTranches 74
TRORSversusRepos 75
EquityTRORS:CorporateLoansDisguisedas
CapitalInjections 76
InformationAsymmetryandMoralHazard 78
CDSversusTRORS 78
Pay-as-You-Go 79
Indexes 81
CHAPTER4
CDOsandtheGlobalCapitalMarkets 83
EvolutionoftheCDOMarket 84
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Contents vii
CHAPTER5
RiskandValuationIssues 91
ThePortfolioDiversificationMyth 91
ModernPortfolioTheory:BaneofCDOs 92
AbnormalIsNormal 96
Mark-to-MarketHazard 98
CashFlowHazard 99
GlobalDerivativesRisk 100
LoansandLeveragedLoans 101
TheLeverageParadox 103
NewStructuredFinanceDeals 104
Fraud 104
HedgeFunds:ANewInvestorClass 107
Tavakoli’sLaw,HedgeFunds,andtheGreatUnwind 110
BrainDamageTheory 112
DeadMan’sCurveandLeveragedFunds 113
MarginofSafetyversusOne-SidedIlliquidLeveragedBets 114
CHAPTER6
EarlyCDOTechnology 117
TrueSaleHybridandSyntheticStructures 117
CreditEnhancement 119
MonolineandMultilineInsurance 119
CDOClassification 121
MarketValueCDOs 124
CashFlowCDOs 124
TheOriginsofU.S.Securitization 126
CollateralizedMortgageObligations 135
CHAPTER7
EarlyWarningCommercialFinancialServices 143
RatingAgencies’FailedModels 143
AnatomyofaFlawedProcess 144
Terminology 145
EarlyRedFlags 147
CFSGetsCreative 149
SellingOuttheFuture 149
IgnoringanAuditReport 150
LessonstoBeLearned 151
FalloutfromCFS’sBankruptcy 153