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It's perhaps a little clearer from the film's script. These are the key phrases

MARK: Are you worried about rising default rates?

MR. CHAU: I assume no risk for these products myself.

and

MARK: Okay. This is a pool of, say, 50 million in subprime loans. How much money could be out there betting on it through these synthetic CDOs and swaps?!. How much money could be out there betting on it through these synthetic CDOs and swaps?! Right now?! Tonight?!

MR. CHAU: A billion dollars.

and

MARK: CDO A has parts of CDO B and CDO B has parts CDO A, but then both get put inside CDO C?

MR. CHAU: That one's called a CDO Squared. And then there are CDOs made up of the opposite side of the bet you made with your swaps. We call them synthetic CDOs.

So, we have a CDO Manager whose job it is to manage nearly the GDP of a small country, but who has zero interest in assessing the real risk of what he's buying (e.g. the risk that the mortgages might go into default). We learn that CDO managers around the country are betting many multiples the value of the blocks of mortgages on their continued survival and we learn that the CDOs (many of which contain garbage mortgages on the verge of default) are overlapping with each other.

The ultimate upshot of this conversation is that if one CDO fails (if even a few hundred mortgage holders default on their mortgages), it will take down the entire swap. Not only that, but the CDOs are worth billions, riding on the actions of homeowners who've been missold dodgy mortgages.

It's perhaps a little clearer from the film's script. These are the key phrases

MARK: Are you worried about rising default rates?

MR. CHAU: I assume no risk for these products myself.

and

MARK: Okay. This is a pool of, say, 50 million in subprime loans. How much money could be out there betting on it through these synthetic CDOs and swaps?! Right now?! Tonight?!

MR. CHAU: A billion dollars.

and

MARK: CDO A has parts of CDO B and CDO B has parts CDO A, but then both get put inside CDO C?

MR. CHAU: That one's called a CDO Squared. And then there are CDOs made up of the opposite side of the bet you made with your swaps. We call them synthetic CDOs.

So, we have a CDO Manager whose job it is to manage nearly the GDP of a small country, but who has zero interest in assessing the real risk of what he's buying (e.g. that the mortgages might default). We learn that CDO managers around the country are betting many multiples the value of the blocks of mortgages on their continued survival and we learn that the CDOs (many of which contain garbage mortgages on the verge of default) are overlapping with each other.

The ultimate upshot of this conversation is that if one CDO fails (if even a few hundred mortgage holders default on their mortgages), it will take down the entire swap. Not only that, but the CDOs are worth billions, riding on the actions of homeowners who've been missold dodgy mortgages.

It's perhaps a little clearer from the film's script. These are the key phrases

MARK: Are you worried about rising default rates?

MR. CHAU: I assume no risk for these products myself.

and

MARK: Okay. This is a pool of, say, 50 million in subprime loans. How much money could be out there betting on it through these synthetic CDOs and swaps?! Right now?! Tonight?!

MR. CHAU: A billion dollars.

and

MARK: CDO A has parts of CDO B and CDO B has parts CDO A, but then both get put inside CDO C?

MR. CHAU: That one's called a CDO Squared. And then there are CDOs made up of the opposite side of the bet you made with your swaps. We call them synthetic CDOs.

So, we have a CDO Manager whose job it is to manage nearly the GDP of a small country, but who has zero interest in assessing the real risk of what he's buying (e.g. the risk that the mortgages might go into default). We learn that CDO managers around the country are betting many multiples the value of the blocks of mortgages on their continued survival and we learn that the CDOs (many of which contain garbage mortgages on the verge of default) are overlapping with each other.

The ultimate upshot of this conversation is that if one CDO fails (if even a few hundred mortgage holders default on their mortgages), it will take down the entire swap. Not only that, but the CDOs are worth billions, riding on the actions of homeowners who've been missold dodgy mortgages.

Source Link
user7812
user7812

It's perhaps a little clearer from the film's script. These are the key phrases

MARK: Are you worried about rising default rates?

MR. CHAU: I assume no risk for these products myself.

and

MARK: Okay. This is a pool of, say, 50 million in subprime loans. How much money could be out there betting on it through these synthetic CDOs and swaps?! Right now?! Tonight?!

MR. CHAU: A billion dollars.

and

MARK: CDO A has parts of CDO B and CDO B has parts CDO A, but then both get put inside CDO C?

MR. CHAU: That one's called a CDO Squared. And then there are CDOs made up of the opposite side of the bet you made with your swaps. We call them synthetic CDOs.

So, we have a CDO Manager whose job it is to manage nearly the GDP of a small country, but who has zero interest in assessing the real risk of what he's buying (e.g. that the mortgages might default). We learn that CDO managers around the country are betting many multiples the value of the blocks of mortgages on their continued survival and we learn that the CDOs (many of which contain garbage mortgages on the verge of default) are overlapping with each other.

The ultimate upshot of this conversation is that if one CDO fails (if even a few hundred mortgage holders default on their mortgages), it will take down the entire swap. Not only that, but the CDOs are worth billions, riding on the actions of homeowners who've been missold dodgy mortgages.