In 2015, several large banks began selling billions in something called a “bespoke tranche Opportunity”   this is just

Left to right: Steve Carell plays Mark Baum and Ryan Gosling plays Jared Vennett in The Big Short from Paramount Pictures and Regency Enterprises

another name for CDO as quoted by Bloomberg.

A bundle of mortgage-backed securities. Yes, a bundle of bundles of mortgages. There were also “CDO Squared,” which were bundles of bundles of bundles of mortgages. As you would imagine, these got so complicated that nobody really understood what the underlying value of these were. Yet in many cases they were still rated as very safe investments.

Recalling the subprime and global crisis of 2008 unwinding Credit Default Swaps, Bonds and Basis Trade, 

The crisis gave the birth to new jargons and terminologies in the world of financial market;

  • [h]ypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.

In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a  is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default.

In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

  • Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.
  • so What exactly means a Bank sold $2 billion swaps on France :

It is an arbitrage strategy that looks to profit/earn carry from the difference between CDS and Bond market pricing of credit risk. Typically it is created by buying bonds and simultaneously buying CDS protection (a hedge) to lock in a perceived valuation difference]

So if banks were selling bonds and selling hedges, then it would show up as reduced bond exposure but increased CDS exposure (they sell bonds, and sell CDS).

 

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