Friday, September 28, 2007

There's a New Nerd in Town

by Tanta on 9/28/2007 09:46:00 AM

Via Mr. Coppedge, I see Accrued Interest has a nice UberNerd (AccruederNerd?) on CDO structures that I missed first time around, with a follow-up here that will warm the heart of any poor downtrodden credit analyst who got stomped on by the quants. I recommend it; it makes a point I've tried but dismally failed to make clearly, which is that the big issue for a lot of these deals is timing of default, not level of default. If you're still confused about how a relatively low level of early default can hurt much more than a comparatively higher level of later default on a structured security, this post will certainly help you.

For contextual purposes, here's a set of charts from Moodys that you may ponder. (These are MBS/ABS issues, not CDOs, but they'll be the collateral in a lot of CDOs.) Notice how the slope of the 2006 vintage changes in just six months, as more of the deals in that vintage get old enough. Notice also that this chart is based on original balance (so the numbers won't match anything you see quoted based on current balances), and that the comparison is the 2000-2001 vintage. That's a meaningful comparison because, until 2005-2006 came along, the 2000-2001 vintages were about the ugliest anyone had seen in a long time.