Be structured in tranches, which are called tranches, ordering, highest to lowest, the probability of default, and the commitment to prioritize the payment to the least bad. That is: 1. I buy a package of MBS, which tells me that the first three MBS are relatively good, the three seconds, very regular and the three others, frankly bad. This means that I have structured the package MBS in three tranches: the relatively good, very consistent and very bad. 2.
I agree that if the tranche will not pay very bad (or as they say these gentlemen, if in the wrong section incur in default), but collecting some of the very regular and quite tranche of relatively good, everything will go to pay mortgages tranche relatively good, thus, automatically, this tranche may be rated AAA. 3. (7 Comment: The "Comments IESE Economic Situation, January 2008, of which I have removed most of what I am saying, we call this" financial magic ") ii. To finish rolling to San Quirze, these arranged in MBS tranches were renamed as CDO (Collateralized Debt Obligations, Collateralized debt obligations), 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, assuming a risk of default by the CDO would buy gaining more interest. So, bought the CDO and said, "if it fails, I lose money.
If it fails, recovery plus interest. "Iv. Continuing with the inventions, set up another instrument, the Synthetic CDOs, which have not fully understood, but made a surprisingly high yield.