Essays
Tagged "credit"
2 essays touching on credit.
Securitization: One Pool of Loans, Wearing Different Credit Ratings
Securitization pools ordinary loans into a legally separate vehicle and slices the cash flows into tranches — senior, mezzanine, equity — that get paid in a fixed order.
Securitization pools ordinary loans into a legally separate vehicle and slices the cash flows into tranches — senior, mezzanine, equity — that get paid in a fixed order. The same pool of loans can back a AAA-rated slice and a junk-rated slice at once, because the rating describes the slice's place in the payment order, not the loans underneath it. What securitization actually is, why that structure worked exactly as designed for decades before 2008 broke the one assumption it depended on, and what changed in the rules afterward — with paired Indian and international examples throughout.
Surya · 7 min read
Credit Default Swaps: Protection Nobody Has to Own
The bond never changes hands. The default risk does — and so can anyone's opinion of it.
A credit default swap looks like insurance on a bond — a premium now, a payout if the borrower defaults. Real insurance requires you to actually own the thing you're insuring. A CDS never checks. That single missing requirement is where a market for hedging credit risk quietly became a market for betting on it.
Surya · 8 min read