Comments on: Why did all those super-seniors exist? http://blogs.reuters.com/felix-salmon/2010/04/28/why-did-all-those-super-seniors-exist/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: AnonymousChef http://blogs.reuters.com/felix-salmon/2010/04/28/why-did-all-those-super-seniors-exist/comment-page-1/#comment-14208 Thu, 29 Apr 2010 15:43:30 +0000 http://blogs.reuters.com/felix-salmon/?p=3605#comment-14208 Thanks Felix!

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By: Felix Salmon http://blogs.reuters.com/felix-salmon/2010/04/28/why-did-all-those-super-seniors-exist/comment-page-1/#comment-14180 Thu, 29 Apr 2010 02:14:06 +0000 http://blogs.reuters.com/felix-salmon/?p=3605#comment-14180 AnonymousChef, start here:
http://www.portfolio.com/views/blogs/mar ket-movers/2008/12/01/whats-a-super-seni or-tranche

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By: ExaminerCarter http://blogs.reuters.com/felix-salmon/2010/04/28/why-did-all-those-super-seniors-exist/comment-page-1/#comment-14179 Thu, 29 Apr 2010 01:52:00 +0000 http://blogs.reuters.com/felix-salmon/?p=3605#comment-14179 Felix,
Gary Gorton answered your question in his response to the Financial Crisis Inquiry Commission at http://fcic.gov/hearings/pdfs/2010-0227- Gorton.pdf

Why were super-seniors created?
“A problem with the new banking system is that it depends on collateral to guarantee the safety of the deposits. But, there are many demands for such collateral. Foreign governments and investors have significant demands for U.S. Treasury bonds, U.S. agency bonds, and corporate bonds (about 40 percent is held by foreigners). Treasury and agency bonds are also needed to collateralize derivatives positions. Further, they are needed to use as collateral for clearing and settlement of financial transactions. There are few AAA corporate bonds. Roughly speaking (which is the best that can be done, given the data available), the total amount of possible collateral in U.S. bond markets, minus the amount held by foreigners is about $16 trillion. The amount used to collateralize derivatives positions (according to ISDA) is about $4 trillion. It is not known how much is needed for clearing and settlement. Repo needs, say, $12 trillion. The demand for collateral has been largely met by securitization, a 30‐year old innovation that allows for efficient financing of loans. Repo is to a significant degree based on securitized bonds as collateral, a combination called “securitized banking.” The shortage of collateral for repo, derivatives, and clearing/settlement is reminiscent of the shortages of money in early America, which is what led to demand deposit banking.”

Why were they retained?
“There is a story that is popular called “originate‐to‐distribute” which claims that securitizations should not end up on bank balance sheets. There is no basis for this idea. In fact, there is an important reason for why banks did hold some of these bonds: these bonds were needed as collateral for a form of depository banking. The other part of the new banking sector involves the new
“depositors.””

“Institutional investors and nonfinancial firms have demands for checking accounts just like you and I do. But, for them there is no safe banking account because deposit insurance is limited. So, where does an institutional investor go to deposit money? The Institutional investor wants to earn interest, have immediate access to the money, and be assured that the deposit is safe. But, there is no checking account insured by the FDIC if you want to deposit $100 million. Where can this depositor go? The answer is that the institutional investor goes to the repo market.”

See also:
Gorton, Gary (2009a), “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,” http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=1401882

Gorton, Gary and Andrew Metrick (2009a), “Securitized Banking and the Run on Repo,”
http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=1440752

Hope this helps.

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By: AnonymousChef http://blogs.reuters.com/felix-salmon/2010/04/28/why-did-all-those-super-seniors-exist/comment-page-1/#comment-14169 Wed, 28 Apr 2010 21:42:02 +0000 http://blogs.reuters.com/felix-salmon/?p=3605#comment-14169 Felix,

Could you shed more light on what a super-senior tranche is? Is it just the last tranche to get hit when the defaults come? Or does it have some other characteristic?

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By: csissoko http://blogs.reuters.com/felix-salmon/2010/04/28/why-did-all-those-super-seniors-exist/comment-page-1/#comment-14168 Wed, 28 Apr 2010 21:34:40 +0000 http://blogs.reuters.com/felix-salmon/?p=3605#comment-14168 I think the reason the super senior “had” to exist in the 2006-2007 environment is because that’s where the risk was most underpriced. Many of the CDO “investors” were interested in high yield AAA assets, that is the leveraged senior, but not super senior segment of the CDO. But if market makers had tried to sell protection on this segment of the CDO, that protection would have tended to be expensive for the same reason that it paid investors well relative to the super senior.

Selling packages that included large super senior tranches allowed the structured financiers to earn their salaries by keeping costs down for protection buyers, while also meeting the needs of CDO “investors” looking for high yield assets. Unfortunately they ended up warehousing large quantities of the residual super senior risk in the banks.

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By: KidDynamite http://blogs.reuters.com/felix-salmon/2010/04/28/why-did-all-those-super-seniors-exist/comment-page-1/#comment-14167 Wed, 28 Apr 2010 21:07:46 +0000 http://blogs.reuters.com/felix-salmon/?p=3605#comment-14167 i think the second part of your post nails it, Felix. no need to get fancy with theories – the banks generally made the same error that their clients did – they were yield hogs too. by the time they realized, it was too late, and they couldn’t offload the risk. kaBOOM.

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