CDO & CLO itself doesnot give leverage, if I remember correctly?I remember CDO is about multiple tranches of the pool of debt obligations being rated differently from high to low and the re-payment of interests/principle use waterfall method.
How does the leverage step in?
how leverage comes in? based on one pool of mortgages
assuming bank A, it give money to some poor credit people .
they use this mortgage to sell CDO, then they get money back in (proceeds of cdo sales)
they use the new proceeds to issue more mortgage, and use new mortage to issue cdo,
they have new proceeds,
so the whole process, you can see, nothing is really created , i.e. no real values there, but the money is more and more created, why?
root of all,
they securitized "CREDIT". credit , previously was some virtual invisible stuff, now become the real money, they are now same as the house, the factory, the gold, they can sell for money.
Use Credit to get money,
Leverage.
they use this mortgage to sell CDO, then they get money back in (proceeds of cdo sales)
they use the new proceeds to issue more mortgage, and use new mortage to issue cdo,
they have new proceeds,
so the whole process, you can see, nothing is really created , i.e. no real values there, but the money is more and more created, why?
root of all,
they securitized "CREDIT". credit , previously was some virtual invisible stuff, now become the real money, they are now same as the house, the factory, the gold, they can sell for money.
Use Credit to get money,
Leverage.
Huasing Association 1999 - 2013