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The amounts are not directly related to the value of the houses. CDO funds are pretty large, they pool thousands of mortgages and the total debt before slicing will typically run into the billion $ (you need to amortize a lot of fixed bureaucratic costs). And then, defaults are cumulated by value of coupon and capital lost to determine what tranche they hit. The "watermarks" for the tranches can be surprisingly low. e.g. for corporate debt CDOs, the "equity" tranche ends at around 3%. Then the mezzanine tranche ends at 5-7% of defaults. And then you hit the senior tranches of various ratings, but in any case you'll be hitting (and eating) into AAA+ before 30-50% depending on the initial quality of the loans agregated. And this will definetely be hit with funds of fraudulent subprime loans.

Pierre
by Pierre on Mon Aug 20th, 2007 at 04:01:26 AM EST
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