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 F FINANCIAL CRISIS INQUIRY COMMISSION REPORTINANCIAL CRISIS INQUIRY COMMISSION REPORT

Synthetic CDO
Synthetic CDOs, such as Goldman Sachs’s Abacus 2004-1 deal, were complex
paper transactions involving credit default swaps.

1. Short investors CDO 2. Unfunded investors
Short investors enter into credit Unfunded investors, who typically
default swaps with the CDO, buy the super senior tranche, are
referencing assets such as effectively in a swap with the CDO
mortgage-backed securities. The and receive premiums. If the
CDO receives swap premiums. If reference securities do not
the reference securities do not perform and there are not enough
perform, the CDO pays out to the SUPER SENIOR funds within the CDO, the
short investors. investors pay.

Premiums
Unfunded
CREDIT DEFAULT Investors
SWAPS Credit
Protection
Premiums
Short
Investors
Credit 3. Funded investors
Protection
Funded investors (bond holders)
invest cash and expect interest
AAA
Reference and principal payments. They
Securities typically incur losses before the
unfunded investors.
Interest and
Principal
Payments Bond
AA
Holders
Cash
A Invested
BBB
AAA
BB
EQUITY
EQUITY
AA
A
BBB 4. Cash Pool
BB
The CDO would invest cash
Cash Pool received from the bond holders
in presumably safe assets.

Figure .