SecondEndofWallStreetQuestions
1. In a pass-through securitization structure, a 5% loss to the mortgage pools would mean an unequal loss for all security holders. True/False. True
2. In a typical private-label mortgage-backed securitization (MBS), the top/senior tranche is entitled to the first 80% of cash flows. The mezzanine tranche gets the next 15%, while the junior/equity tranche gets the last 5%. If, over the life of the security, the losses on this MBS total 10%. What are the losses that would be incurred by the different tranches? The junior and mezz tranches would incur the total 10% loss on the MBS. The junior tranche would lose all 5% and the mezz tranche would lose 5% and its 15% of its cash flow that it is entitled to 3. Thousands of senior tranches of MBS originated between 2004 and 2007 were rated ______________ by credit rating agencies? Why? AAA. These MBS were inaccurately rated due to pressures from investment banks and various conflicts of interest. If an investment bank was not satisfied with the credit agencies ratings, they would often threaten to end the relationship with that agency. As a result, agencies would grossly mislead investors and other banks with inaccurate ratings of the Mortgage Backed Securities in order to keep business with the banks and ensure their own profits. Credit agencies would make most of their profits from ratings of MBSs so it was in their best interest, along with the investment banks, to keep rating troubled securities higher than they should.
4. The raw material for a collateralized debt obligation (CDO) is _______________? The raw material of these "obligations" were made up of cash flow generating assets such as bonds, mortgages, and loans. They are typically made up of BBB, A−, etc. tranches. These tranches included over three trillion dollars of loans to homebuyers with bad credit and undocumented incomes through 2007
5. What was the rationale for giving senior CDO tranches AAA ratings? The idea is that if
2. In a typical private-label mortgage-backed securitization (MBS), the top/senior tranche is entitled to the first 80% of cash flows. The mezzanine tranche gets the next 15%, while the junior/equity tranche gets the last 5%. If, over the life of the security, the losses on this MBS total 10%. What are the losses that would be incurred by the different tranches? The junior and mezz tranches would incur the total 10% loss on the MBS. The junior tranche would lose all 5% and the mezz tranche would lose 5% and its 15% of its cash flow that it is entitled to 3. Thousands of senior tranches of MBS originated between 2004 and 2007 were rated ______________ by credit rating agencies? Why? AAA. These MBS were inaccurately rated due to pressures from investment banks and various conflicts of interest. If an investment bank was not satisfied with the credit agencies ratings, they would often threaten to end the relationship with that agency. As a result, agencies would grossly mislead investors and other banks with inaccurate ratings of the Mortgage Backed Securities in order to keep business with the banks and ensure their own profits. Credit agencies would make most of their profits from ratings of MBSs so it was in their best interest, along with the investment banks, to keep rating troubled securities higher than they should.
4. The raw material for a collateralized debt obligation (CDO) is _______________? The raw material of these "obligations" were made up of cash flow generating assets such as bonds, mortgages, and loans. They are typically made up of BBB, A−, etc. tranches. These tranches included over three trillion dollars of loans to homebuyers with bad credit and undocumented incomes through 2007
5. What was the rationale for giving senior CDO tranches AAA ratings? The idea is that if