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subordination level - known as an attachment point - will be set which will determine the percentage of the portfolio against which AAA rated bonds can be issued.

The super senior tranche is essentially a large slice of the CDO pie which is senior even to a triple-A tranche, hence its moniker.

structuring: the single most important invention in finance, if not economics, in the past few decades.

On our above diagram, the attachment point is at 80 per cent.

The right hand diagram shows the same structure, but with a super-senior tranche incorporated. This is where things start to get rather messy. And indeed, this is where the technological snafu occurred that caused a lot of the current crisis.

low yields.

Yields on AAA ABS were getting low by 2004/2005, low enough that there wasn’t really much interest in buying them. Banks were increasingly finding that with their securitisations and CDOs they couldn’t pass on the AAA tranches or the equity tranches - only the middle stuff. Of course, to complete a deal, you’d need to sell the lot. Or else take some of the risk yourself.

super-senior position was basically a way of further dividing the risk within the AAA tier of the structure

rom the rating agencies point of view - and indeed that of most investors - nothing has changed between the two structures. The AAA notes in both are still above the 20 per cent attachment point specified in the rating agency models.

But there is a fundamental difference. Say we invested $10m in both structures. We’ve shown this as the grey shading. Our investment in the left hand vanilla CDO yields +20bps. Our investment in the right hand CDO (with super senior) yields +40bps. But say we have a crisis, and the losses on the underlying portfolio exceed the 20 per cent attachment point modelled by the rating agencies. We’ve shown this on the diagrams above as a horizontal red line.

pretend the super-senior stake doesn’t exist

So the bank’s remaining risk, after selling off that triple-A-rated synthetic tranche, has been brought down to safer-than-triple-A levels. Some of the banks referred to it as a “quadruple-A” risk, although that’s not a real-world rating. But the banks were so comfortable that defaults at that level could never happen that they didn’t feel any need to hedge themselves against it happening.

Although the Basel risk-weighting requirements were relatively minuscule, they did still tie up reserve capital. Besides, banks had a way of doing better: by buying cheap protection on those super-senior positions using CDS.

JPMorgan received $25 billion in capital under the program.

00 million of CLOs at above-market prices an “important technical event” for the market.

Top-rated CLOs hit record spreads over three-month Libor of 5.25 percentage points in the week ended Nov. 20, the report said. The borrowing benchmark is currently set at 2 percent.