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The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles Morris

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CHAPTER 6
The Great Unwinding
In Chapter 4 we saw how lenders or companies who want to get risky assets off their books could package and sell them as collateralized debt obligations, or CDOs. Suppose you own a portfolio of high-yield bonds with a below-investment-grade rating. To construct the CDO, you put the portfolio into a trust and create a family of bonds with different claims to the portfolio’s cash flows. The top-tier bonds, which might be 80 percent of the total, get first dibs on all cash flows. Since those bonds are almost certain to be fully paid, they get a top credit rating, and conservative investors, like pension funds, are happy to take them off your hands. The rest of the bonds are queued up in the payments “waterfall,” with ...

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