4 ms·

The majority of the debt was synthetics on the underlying, not the original debt.

kbenson 8y ago
I think that only affected how easy/hard it was to determine whether the collateral was good or not. passing a note around doesn't really affect the original amount unless there's some premium or discount on the original value. For example, if 10 people borrow $10 from Alice, she is owed $100. If she packages that as 10 separate loans with one dollar of debt from each person and sells them for $10 each to 10 other people (Bob, Billy, Blake, etc), she's no longer owed anything, but the people downstream she sold it to are. In this case, her reselling has resulted in no additional total debt, but it is harder to tell whether the loan contains deadbeat non-payers or not. If the second set resells again, the obfuscation is even greater. If Alice or some downstream seller sells for less or more than the original loan for some reason (or with different interest, which can't be forced upstream?), then the total debt amount might change. In any case, it's still all down to whether the original loans are secure or not. If the people default, and there's no collateral, the end result is no different how many times it's been resold (if no amount has changed), it's just a matter of who is affected and how easy it is to tell whether the loans are of good quality or not. Although, if I'm mistaken about or missing something, I would definitely like to know.
- dillondoyle 8y ago
  My knowledge here comes from the film Big Short so take that with a grain of salt lol, but they explained it as a step beyond what you describe in that a synthetic CDO as more a bet or insurance on the underlying bundled debt. So like placing a bet of $1000 that the $100 debt owed to alice wont default. https://www.youtube.com/watch?v=EEXTqtH-Oo4 https://www.youtube.com/watch?v=EEXTqtH-Oo4 https://en.wikipedia.org/wiki/Synthetic_CDO https://en.wikipedia.org/wiki/Synthetic_CDO

I think that only affected how easy/hard it was to determine whether the collateral was good or not. passing a note around doesn't really affect the original amount unless there's some premium or discount on the original value. For example, if 10 people borrow $10 from Alice, she is owed $100. If she packages that as 10 separate loans with one dollar of debt from each person and sells them for $10 each to 10 other people (Bob, Billy, Blake, etc), she's no longer owed anything, but the people downstream she sold it to are. In this case, her reselling has resulted in no additional total debt, but it is harder to tell whether the loan contains deadbeat non-payers or not. If the second set resells again, the obfuscation is even greater. If Alice or some downstream seller sells for less or more than the original loan for some reason (or with different interest, which can't be forced upstream?), then the total debt amount might change. In any case, it's still all down to whether the original loans are secure or not. If the people default, and there's no collateral, the end result is no different how many times it's been resold (if no amount has changed), it's just a matter of who is affected and how easy it is to tell whether the loans are of good quality or not. Although, if I'm mistaken about or missing something, I would definitely like to know.

dillondoyle 8y ago
My knowledge here comes from the film Big Short so take that with a grain of salt lol, but they explained it as a step beyond what you describe in that a synthetic CDO as more a bet or insurance on the underlying bundled debt. So like placing a bet of $1000 that the $100 debt owed to alice wont default. https://www.youtube.com/watch?v=EEXTqtH-Oo4 https://www.youtube.com/watch?v=EEXTqtH-Oo4 https://en.wikipedia.org/wiki/Synthetic_CDO https://en.wikipedia.org/wiki/Synthetic_CDO