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August 31, 2010


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John Magill

Where the banks buying their own CDO's or were they having to absorb the super-senior portion of the CDO as they couldn't off-load it?

Chris Skinner

Hi John

For clarity, the banks were creating a daisy chain in the Mezzanine layer of CDOs, not the super-senior:

"The top 80 percent, the less risky layers or so-called 'super senior', were held by the banks themselves. The beauty of owning that supposedly safe top portion was that it required hardly any money be held in reserve.

"That left 20 percent, which the banks did not want to keep because it was riskier and required them to set aside reserves to cover any losses. Banks often sold the bottom, riskiest part to hedge funds.

"That left the middle layer, known on Wall Street as the 'mezzanine', which was sold to new CDOs whose top 80 percent was ultimately owned by ... the banks."


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