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It wasnt all by himself, as we will see soon: .the sorts of investors who handed money to Wing Chau, and thus bought the triple A rated traches of CDOs German banks, Taiwanese insurance companies, Japanese farmers unions, European pension funds, and in general, entities more or less required to invest in AAA rated bonds -did precisely so because they were supposed to be foolproof, impervious to losses, and unnecessary to monitor of think about very much. Yves again. Note that these are the international equivalent of widows and orphans, but because they are exotic, presumably elicit less sympathy. But as we will discuss soon, by this point in the tale, January 2007, that list of prototypical chumps was out of date, which has further implications for the real significance of this trade. Starting in mid-2005, when the creation of a standardized credit default swap on mortgages made it feasible to take large subprime short positions, a system quickly developed that overrode the normal checks and balances of the market and allowed the unscrupulous to 1. Profit from making bad loans, and 2. Force the creation of more bad loans, which would both increase their profits and make it more likely that their bet would be successful. Most mortgage industry participants assumed there was a degree of rationality that would constrain reckless behavior.
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The buyer then makes a down payment and the seller carries a promissory note for the balance. Payment terms are generally quite flexible. Interest can be deferred or payments can be interest only for the first six to twelve months. Most end with balloon payments. Recently, there have been the addition of provisions related to the performance of the business. Some of these provisions include pure debt, notes contingent on performance and even equity participation. Risk structures can also be changed to include earn outs. this is where key players on the sell side are incentivized to stay on after the transition. Pros and Cons Seller is disadvantaged as they cannot exit or receive full settlement after the transition.