Hi,

Thanks for the comment I am glad you like the video. I am curious to know how the subprime crisis has affect animals so I would appreciate it if you would send over or post your article when its done.

Best Regards,
Dave

hi Dave

Can u please explain me who is the owner of these SPV/SIVs. Is it totally financed by short term debt. If these are financed by equity capital also, then who is the provider of that capital. Please take any example.

I m trying to take an example of CITI Group, Does CITI group creates such type of SIV/SPV. If yes then wat will be the capital contribution of CITI. Will CITI group shareholder get any benefit from the SPV/SIV (i mean any portion of that 4% spread, which u take in example). If no benefit goes to CITI shareholders, then wat is benefit to CITI group in crearing such type of SPV/SIV. And further when such pool of assets get created and purchased by SPV/SIV, will the seller get 100% amount for those assets/loans.

In brief, i want to know about the owners who get benefited from that huge spread which SPV/SIV earns.

Thanks and Regards
Akhil Mittal

Hi Akhil,

The capital structure of these things is obviously pretty complicated and to be honest I have not seen any good explanations around of exactly how these things are set up from an ownership standpoint.

From what I can tell however the company that sets up the special purpose vehicle is called the sponsor and yes they do maintain either all or a piece of the ownership in the entity depending on the situation.

Other capital can be raised from investment funds and private equity for example and in those cases as I understand it those entities would be part owner in the vehical as well.

So in short you are correct that there would be no benefit of setting these things up if the sponsoring banks were not earning part of that spread so there is a flow through back to them and their shareholders.

Best Regards,
Dave

hi

if citigroup creates an spv, will it consolidate the results of spv in group's consolidated results.

thanks and regards
akhil mittal

Hi Akhil,

I would think so yes but I am not an accountant so I am not sure on the specific details here.

Best Regards,
Dave

David,

excellent series. thanks for putting this up.

I have two questions on the ratings and traunches.

1. In the pool of mortgages, you say the lowest traunch "takes the loss first" and the highest one "takes the loss last". I understand the concept that the most risky loans need to face the consequences first, but who is it exactly that takes the loss ? It is a pool of mortgages and is diced and sold off as shares, so all traunches are part of each share right ?

2. A high rating for the CDO based on the top traunch, that doesn't make sense. How can the CDO be rated based on the top traunch alone ? It misleads the investor. How could the ratings agency get away with this ?

thanks,
Arvind

Hi Arvind,

Glad to hear from you.

I think there may be some confusion over exactly how these pools of mortgages are divided up into tranches.

The loans that make up the big pool of mortgages are all of the same quality. Then this pool of loans is divided up by who takes the losses first and then rated accordingly.

So lets say for example that you and I are both financial institutions and we are both buying 50% of a pool which contains $100 Million in mortgages. We agree however that the first 10% of losses on this pool of mortages will go to me and therefore my 50% is given a junk rating which I get paid a higher interest rate for.

Since you are shielded from the first 10% of losses, your half is given a AAA rating. So we have just taken a big pool of junk debt and turned half of it into AAA rated paper.

Hope that makes sense. If there are any other questions or comments on this one please feel free to ask.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.