Paul Tucker: A perspective on recent monetary and financial system
developments
Speech by Mr Paul Tucker, Executive Director and Member of the Monetary Policy Committee of the
Bank of England, at Merrill Lynch Conference "A perspective on recent monetary and financial system
developments", London, 26 April 2007.
* * *
Global monetary and financial stability
The past year or so has been marked by resilience in both the global economy and the international
financial system. World growth has been robust. On average, headline inflation across the
industrialised world has remained contained. Capital markets have, so far, weathered the gradual
withdrawal of monetary accommodation in much of the G7, and also a series of specific disturbances,
without destabilising spillovers. In short, the world has enjoyed a further period of monetary and
financial stability. Against that background, banks and dealers have posted fairly remarkable profits,
accumulating more capital resources; and the (risk-unadjusted) returns of the fund sector - and so
probably for most of you here today - have been healthy.
There are, for sure, wrinkles in this picture, including here in the UK. But overall it is probably not what
most commentators would have expected given that oil prices have more than doubled over recent
years. For financial markets, it has surely been important that such a large cost shock has not led to a
pronounced rise in global inflation, dislodging medium-term inflation expectations, and so prompting
industrialised country monetary authorities to slam on the brakes. With the build up of household debt
in many countries, and releveraging of parts of the corporate sector, that would not have been a happy
prospect.
That, taking the industrialised world as a whole, monetary credibility has been sustained without
aggressive policy action may owe something to the reasons for the increases in energy and other
commodity prices - namely, the rise of China, India and other Asian economies which, as well as
boosting global demand, has also been putting downward pressure on internationally traded goods
prices. But, as the Bank has argued before, the way these relative price changes play out in terms of
headline consumer price inflation depends on the overall path of aggregate nominal demand. And that
in turn owes something to the behaviour of central banks.
The textbook response to a cost shock is supposedly to allow the price level to rise, with the
associated temporary pick up in inflation being just that - temporary. In the jargon of central banking,
the "first round effects should be accommodated" in order to contain output volatility; but any
second-round effects on inflation, through wage bargaining and medium-term inflation expectations,
should of course be prevented.
What of practice? Well, notwithstanding the rise in inflation in the UK over the past eighteen months, it
is moot whether any of the major central banks did in fact fully accommodate the first-round effects of
the oil price rise. That the full impact of the rise in costs has not passed through to inflation owes
something, I believe, to wariness amongst central bankers of their being able, given uncertainty about
the underlying shocks, to calibrate policy with sufficient precision to bring about such a neat but vitally
important distinction between first-round and second-round effects; let alone of their being able to
communicate such a strategy to the public, the business community and financial markets. Textbook
orthodoxy might perhaps have been more compelling if the rise in energy prices had been both sharp
and caused purely by interruptions to, or constraints on, the supply of energy. But when, as over the
past couple of years, the rise in costs was partly the consequence of increased global demand, and
the price rise drawn out, the wariness in fully accommodating the first round effects was, I think,
tangible, and reasonable.
UK monetary policy
That has been the backdrop to my own approach to monetary policy over the past year or so. The
policy stance has needed to be set and explained in the context of cost shocks and demand
conditions, placing a premium on clarity of communication about monetary strategy.1 I have judged
that to be a delicate exercise given recent and prospective volatility in headline inflation. This thinking
informed my vote against an increase in Bank Rate in January. CPI inflation had risen quite sharply,
but was - and, I should say, still is - also expected to fall back quite sharply towards the 2% target.
Provided that broadly "humped" path for inflation materialised over the coming months, the upside risk
to medium-term inflation expectations seemed likely to subside. It was not a matter of my wanting to
avoid surprising the markets in some narrow sense, which in the greater scheme of things is neither
here nor there. Rather, I was concerned that an immediate move might, on balance, cause
unnecessary confusion about the Committee's view of the medium-term outlook for inflation and about
monetary strategy. In the event, subsequent speeches by colleagues, and the medium-term
perspective of the February Inflation Report, helped to keep that genie in the bottle.
In February, I was strongly in favour of widening the width of the Inflation Report "fan chart" for inflation
during the coming year, to underline the near-term uncertainty about, and the great difficulty in
forecasting, the path of utility prices. It was vital to convey the medium-term prospect, and also that we
stand ready to act if the risks warranted it.
More recently, with Bank Rate at 5.25% and a modestly upward sloping money market curve, I have
characterised monetary conditions as "edging towards restrictive", so long as inflation does as
expected fall back in the near term. That has been appropriate given the degree of pricing power
apparently emergent in conditions of relatively high capacity utilisation amongst firms. It has provided
the platform needed going forward to restrain inflation pressures, and to maintain anchored inflation
expectations, at a time when, understandably, there is public debate about the outlook given that CPI
inflation rose above 3% for the first time, triggering an open letter from the Governor, on behalf of the
Committee, to the Chancellor.
Looking ahead, my votes, and my approach to communicating our monetary strategy, will depend on
balancing the medium-term prospect for demand pressures alongside uncertainties about supply
conditions and near-term inflation expectations caused by volatility in energy costs. This will entail
making judgments about a whole range of influences, including whether or not residual slack in the
labour market might in time, given robust business investment, help to ease capacity constraints;
whether or not competitive conditions amongst retailers will dampen the feed through of accelerating
producer prices into consumer prices; and, most crucially of all, whether wage bargainers and price
setters recognise the absolute determination of the Committee to maintain price stability.
Risks to the global capital markets
If anchored inflation expectations have so far been maintained, here and elsewhere, two other risks in,
and for, the global financial environment continue to preoccupy commentators: current account
imbalances; and compressed risk premia, together with an apparently high risk appetite, in credit
markets.
There are, I would suggest, some interesting contrasts between these two risks, which - following the
Bank's Financial Stability Report - I shall call "global imbalances" and "low risk premia". They can be
contrasted in two dimensions: the probability that there is some kind of "disequilibrium" that needs to
correct; and the probability that any such correction, or adjustment, will produce destabilising spillovers
in the financial system.
On the first - the probability of adjustment - it is widely agreed by economists that one symptom of
global imbalances, the US current account deficit, is unsustainable. It cannot continue indefinitely at
the same rate because eventually the US's external debt-servicing burden would become too great.
That there will be adjustment, somehow or other, is therefore viewed by most commentators as near
certain. By contrast, while the low risk premia across credit markets are hard to explain, no one can
say for certain that they are unsustainable. A number of changes in the environment point towards
some sustainable reduction in risk premia: more credible monetary regimes; more flexible labour and
product markets, helping economies to adjust to nasty shocks; improved instruments and markets for
managing risk; better diversified portfolios. Whether or not that merits the degree of risk premia
compression seen over recent years is open to question. For some while now, I have encountered few
people in the market who regard credit risk as fairly priced. A distinction is typically drawn - including
in the Bank's Financial Stability Reports2 - between a "fast fuse" risk, in which credit is abruptly
repriced; and a "slow fuse" risk, in which cheap credit leads over time to overleveraged borrowers and
so to vulnerability to a deterioration in the global economy. As time passes, attention has perhaps
been shifting to the longer-fuse risk, given signs of a pick up in aggregate corporate sector leverage
and gradual dilution of covenants in loan terms and conditions, most obviously recently in so-called
"covenant-lite" transactions in the leveraged loan market.3 But, in contrast to global imbalances, no
one can say with complete conviction that a lower risk premia environment is definitely unsustainable,
which may contribute to explaining why few market participants seem prepared to bet on the time or
scale of any correction.
In terms of the second dimension - the probability that any adjustment would be disorderly -market
practitioners at least seem to regard "low risk premia" more seriously than "global imbalances".
Resolution of the problem of global imbalances could come in various ways, not all of which need
involve an abrupt correction in asset prices or further movements in nominal exchange rates. For
example, the US might obtain greater competitiveness through a depreciation in the dollar's real value
if inflation in China and elsewhere were to be relatively high for a period. But, for my purposes today,
the key point is that any correction in asset prices would most obviously be concentrated, at least
initially, in the foreign exchange markets and, if associated with a reduced appetite for
dollardenominated assets, plausibly in US Treasury yields too - perhaps amplified by various option-like
structures.4 But these are, of course, the deepest, most liquid markets in the world. So while sharp
changes would no doubt inflict losses through parts of financial system, many practitioners seem to
regard the market dynamics as manageable. Indeed, when in the Bank's Market Intelligence rounds
we explore this issue, the mechanism that elicits most concern is that any consequent macroeconomic
slowdown - brought about in the US by higher risk-free bond yields or in the euro area by exchange
rate appreciation - might put pressure on the corporate and household sectors after a period in which
credit risk may have been underpriced and so abundantly available. In other words, discussion of
"global imbalances" shades into an exploration of the potential consequences of "low risk premia". But
more important, the fundamental changes in the structure of credit markets over the past half decade
or so have left many practitioners uncertain about the dynamics of any adjustment. Views vary of
course, with some seeing the system as clearly more resilient than half a decade ago, but on the
whole practitioners seem to be more uncertain about the potential for nasty spillovers from adjustment
in "low risk premia" than in "global imbalances".
Vehicular finance
This uncertainty stems from changes not just in instruments and markets, but also in institutions - ie in
the nature and structure of financial intermediaries. This is the age of what I call Vehicular Finance.
The key intermediaries are no longer just banks, securities dealers, insurance companies, mutual
funds and pension funds. They include hedge funds of course, but also Collateralised Debt
Obligations, specialist Monoline Financial Guarantors, Credit Derivative Product Companies,
Structured Investment Vehicles, Commercial Paper conduits, Leverage Buyout Funds - and on and
on.5 These vehicles can fit together like Russian dolls. By way of illustration - and, I fear, slipping for a
moment into alphabet soup - SIVs may hold monoline-wrapped AAA-tranches of CDOs, which may
hold tranches of other CDOs, which hold LBO debt of all types as well as asset-backed securities
bundling together household loans. (The diagram may, or may not, help!)
What is going on here? One possible explanation is that capital might be being allocated to wherever
its cost is cheapest for a particular desired risk profile. That optimisation involves comparing the capital
charges applied by regulators to regulated institutions; and by rating agencies to various types of
vehicle (SIVs, CPDCs, CDOs, monolines etc). The "smart money" seems to be assembling its own
portfolio of vehicles, so that it can choose from a menu of where to book transactions. One of the
drivers is commonly referred to by practitioners as "ratings arbitrage". Another was of course Basel I,
which triggered the securitisation of high-quality credits, and for quite a few years fuelled a ballooning
of vehicles whose existence depended on commercial banks providing zero-capital-weighted "liquidity"
lines. Basel II will change all of that. Indeed, if central banks are to understand how the global financial
system fits together, we will need to fathom the reconfiguration that Basel II prompts, including the
potential for risk transfers between banks adopting different steps on the ladder of Standard,
Foundation, Advanced approaches that it makes available. For the same underlying reasons, in
pursuing their mission, central banks now need to follow developments beyond the big banks, and I
am very grateful to the hedge funds, CDO managers and others who contribute to the Bank's market
intelligence effort.
Does any of this matter?
a) The dispersion of risk, and central banking instruments
The dialogue is, of course, largely qualitative. Given the variety of vehicles and their use of risk
transfer instruments, it has become a commonplace that "we" no longer know where risk lies. Most
often, the "we" is the official sector, and in particular bank regulators. But "we" might just as well be the
management of banks and dealers.
Some commentators plainly see this as a Bad Thing. Is it? At least as put, I am not so sure.
In the first place, the transfer of risk has been a consequence of the development of wholesale
markets, with reasonably broad participation, in all types of credit risk. Provided liquidity is sustained,
that should aid the system's adjustment to shocks. It also means that, while regulators, central banks
and other analysts have certainly lost some quantity data, our assessment of credit conditions is
enriched by the availability of a wealth of new price signals.
Secondly, while credit risk transfer markets are new, derivative markets in interest rates, exchange
rates and equity prices have existed - on-exchange and over-the-counter - for approaching two
decades. We have not known where those risks are for quite a long time.
Thirdly, if we "no longer know where the risk is", that implies that it has been dispersed beyond the
regulated sector. One might think that was a Good Thing. To take an extreme scenario, if risks were
widely and evenly distributed across savings institutions internationally, a very nasty shock causing a
sharp fall in asset markets would not obviously destabilise the financial system. It would obviously
have macroeconomic consequences, by depleting household wealth and raising the cost of capital for
firms. Other things being equal, central banks could respond by adopting an easier path for interest
rates than otherwise, in order to maintain aggregate demand broadly in line with aggregate supply,
with the objective of keeping inflation in line with explicit or implicit targets. Although the original shock
may be nasty, the response would be the routine use of the routine instrument: the price of central
bank money. There is no question of a so-called Greenspan (or any other kind of) "put" here; the focus
would be not asset prices, but the outlook for spending in the economy and so inflation.
This is obviously rather different from a similarly nasty shock producing severe disorder in a banking
system that was carrying unduly concentrated exposures of some kind. For a central banker, banks
matter because their liabilities are used as money, they are at the centre of the payments system, and
they carry an associated asset/liability maturity mismatch.6 Banking system distress is therefore
typically characterised by a liquidity run. Faced with that, a central bank's instrument - used, where
necessary, in collaboration with its regulatory and finance ministry partners - is to supply the system
with an increased quantity of its money, without necessarily changing its price. Given the need to take
collateral to protect against risk, and to charge a premium to create the right incentives, establishing a
routine framework for such operations without creating moral hazard remains "work in progress" for
the international central banking community.7
So it would seem that there is a good deal to welcome in the greater dispersion of risk made possible
by modern instruments, markets and institutions.
But there are most certainly qualifications to such an apparently alluring conclusion.
b) The banking system's residual risk, stress testing and transparency
The banking system retains risk in a number of ways, both pre- and post-risk transfer, and its
aggregate balance sheet has in fact expanded considerably.8 Pre-risk transfer, banks and dealers
hold, or finance, warehouses of portfolios of loans to households and corporates on their way to
securitisation,9 meaning that the banking system can still find itself "holding the parcel" when the
music stops. Post-risk transfer, some risk is contingently retained by virtue of banks and dealers
financing the acquisition of risk by hedge funds and others. This entails counterparty credit risk and,
taking account of collateral, is akin to writing out-of-the-money put options.
So, for me, the question is not so much "where is the risk?", as "in what circumstances could risk flow
back to the banking system?"; and "do banks have enough capital and liquidity to absorb such flows
without stress?"
This is relevant not only to credit risk, but also to transfers of complex market risks. In providing
bespoke "solutions" to their corporate and investment management clients, investment banks
accumulate complex market risk exposures that are hedged largely in public, and so relatively "vanilla"
wholesale markets. These hedges are inevitably imperfect. Some of the residual market risk is now
occasionally transferred to the fund sector, via for example variance swaps or correlation swaps,
transforming market risk into counterparty credit risk - underlining the importance of the work of the
industry's Counterparty Risk Management Group in debating and promulgating prudent practices.10
Other imperfectly hedged risks are retained, leaving intermediaries with so-called "basis risk" - or,
more prosaically, the risk that assumed correlations break down. Put bluntly, if instruments A and B
have subtly (or not so subtly) different characteristics but are nicely correlated for a while, B might be
employed as a "hedge" for A, without the implicit risk exposure turning up in Value At Risk measures.
When a shock hits and the correlation breaks down, the hedge breaks down too, with a double
whammy to VaR and so, for regulated firms, to regulatory capital requirements: through higher
volatility, and a higher measured exposure. To be clear, this is not the fancy of the ivory tower. As
discussed in the Bank's latest Financial Stability Report, it was one of the factors contributing to the
recent volatility in the market for US sub-prime mortgage securitisations. Indeed, this hazard may
conceivably have increased during a period when markets have not been especially volatile.
If investment banking entails warehousing optionality and complex forms of basis risk, it puts a
premium on stress testing. Speaking as a policy maker, I would want so-called macro stress tests to
be complemented by more fine-grained stress tests in which management explore the exposure to
complex risks given their qualitative understanding of their business, and taking into account the
possibility of impaired market liquidity. In other words, risk managers need to do "market intelligence"
7
The Bank of England took some steps in this direction as part of the fundamental reforms to its Sterling
Monetary Framework market operations in summer 2006. The role of central banks in accommodating sharp
(velocity) shocks to the demand for their money was discussed in Tucker P M W (2004), "Managing the
central bank's balance sheet: where monetary policy meets financial stability", Lecture to mark the fifteenth
anniversary of Lombard Street Research, London, June 2004, Bank of England Quarterly Bulletin, Autumn
2004, pp 359-382.
8
A fuller explanation is in Tucker P M W (2006b), "Macro, asset price and financial system uncertainties", Roy
Bridge Memorial Lecture at the Annual Conference of the ACI - Financial Markets Association, London,
December 2006, Bank of England Quarterly Bulletin, Spring 2007, pp 122-130.
9
The composition of the balance sheets of Large and Complex Banks is discussed at greater length in Tucker
P M W (2006b), op. cit.
10
Report on "Towards Greater Financial Stability: A Private Sector Perspective" by the Counterparty Risk
Management Policy Group, July 2005.
BIS Review 44/2007
within their own firms. My sense is that that view is shared by at least some Chief Risk Officers.
Greater transparency of such stress testing would not only shed light on the risks retained by the
banking system, it might also have a productive effect on incentives - rather as greater transparency
has enhanced monetary policy making.
What happens when the music stops: ex ante preparation for stress
But of course severe stress cannot be ruled out. Central banks and practitioners therefore expend
effort thinking about what will happen if and when the music stops.
As the Bank's latest Financial Stability Report discusses, the official sector has stepped up its practice
exercises of various kinds. The private sector analogue to crisis resolution is the "workout", in which a
company is restructured under the shadow of insolvency. In a world characterised by bank
intermediation, workouts typically involved bank syndicates co-ordinated by a few lead banks. Even
country workouts in the early 1980s had that broad shape, albeit with the IMF holding the ring. One
might wonder how on earth it would work today, in a world of traded debt, synthetic risk transfer, and
vehicular finance. Much thinking remains to be done on this, but a policymaker has to form a
preliminary view, just in case the music stops tomorrow. My provisional view is that some investors in
credit risk would find themselves without the skill set to participate in a workout. In a "covenant-lite"
world, they might also find themselves with fewer protections as conditions deteriorated than they
would like ex post. Unless markets seized up, however, they might be able to crystallise their losses
by selling out to funds and bank desks who trade in "distressed credit"; and they in turn might be able
to sell on to funds and banks with specialist workout skills and risk appetites. By such transfers, the
end-game co-ordination problems might be reduced. On the way, some hard bargains would be
struck, and some participants would no doubt be surprised by their losses.
But this relatively benign scenario is not guaranteed. It depends on markets continuing to function; on
the infrastructure holding up through volume surges and stress; on the shadow of the insolvency
regimes in various jurisdictions establishing productive incentives; and on lack of uncertainty in the
terms and conditions of market contracts.
That last point needs underlining. In today's markets, there is a large premium on ex ante clarity and
ex post
certainty, as opposed to negotiation amongst bankers who know and trust each other. The
work required is detailed and largely out of the limelight. But getting clarity around things like "close out
netting" may make all the difference when the music stops.11 The official community therefore needs
to maintain its encouragement and support for private sector initiatives to standardise and improve
documentation. To take just a few examples from what could be a long list, this includes the work of
New York's Global Documentation Steering Group; of various market trade associations; and of
London's Securities Lending and Repo Committee, which helps co-ordinate the work of different parts
of the collateral-financing markets.12
Summary
I have travelled from macro to micro. To maintain the two elements of monetary stability - price
stability, and financial stability - we need credible and effective institutions.
11
Close-out netting is a process by which, following a default, open transactions between two parties are
terminated, each transaction is valued and, together with any outstanding payments, these are reduced to a
single net amount owed by one of the parties to the other. Obtaining legal certainty over recognition of netting
across different products and, in particular, with different legal entities with a common group is very important.
12
The Global Documentation Steering Group (GDSC) is an industry group formed in 1999 to implement the
documentation-related recommendations of the report of Counterparty Risk Management Policy Group
(CRMPG). The primary objective of the Committee is to encourage the harmonisation of documentation in
standard over-the-counter contracts in order to minimise disparities that can exacerbate market, credit and
legal risk. It took the lead in updating the recommendations on documentation issues for the second CRMPG
report released in 2005. GDSC is sponsored by, but independent of, the Federal Reserve Bank of New York.
The hedge fund community is represented on the GDSG. The Stock Lending and Repo Committee, facilitated
and chaired by the Bank of England, provides a forum for practitioners and the authorities to discuss structural
(including legal) developments in London-based securities lending and repo markets.
BIS Review 44/2007
At the macro end of the spectrum, that above all means credible monetary regimes. The MPC is now
ten years old. During that period, inflation expectations have been well anchored to our target. And no
one should be in any doubt that the Committee is determined to keep it that way.
But a credible monetary regime does not insulate the economy, or financial markets, against all
shocks. Over the coming decade, some currently observable imbalances will plausibly work their way
through the system, as the pattern of global saving shifts, asset prices adjust, and we encounter,
eventually, a period of corporate defaults. In ten years time, we may therefore know whether "global
imbalances" and "low risk premia" were resolved with or without stress; and we may be better
informed on whether the changes in the structure of our financial markets help or hinder the
preservation of stability. A benign outcome would be more likely if the industry were to maintain its
efforts on improving ex ante measures to handle stress. Managers of hedge funds and other modern
investment vehicles, as well as banks, have a clear stake in that work.
Annex: Vehicles
CDO: Collateralised debt obligation.
Typically, a structured finance product where a SPV issues notes backed by, or referenced to, a
portfolio of underlying assets. The notes issued are tranched by seniority into senior, mezzanine and
equity. The underlying assets could be corporate bonds, loans or structured finance securities (such
as mortgage-backed securities or notes issued by other CDOs), and they might be owned either
directly or synthetically via credit default swaps.
CDO squared.
A CDO invested in CDO tranches, typically mezzanine tranches of synthetic CDOs.
CDPC: Credit Derivative Product Companies.
A highly-rated limited purpose company, with permanent capital, that sells credit protection on
individual names or synthetic CDO tranches. CDPCs differ from monolines in that they write protection
only via credit default swaps. They are in some respects akin to synthetic banks.
Closed-end fund.
An investment company that issues shares to investors and invests the proceeds in a pool of assets
typically stocks and/or bonds. Recently some funds have invested in "alternative" assets such as
hedge funds, private equity and infrastructure, and structured credit. Shares in closed-end funds are
traded like other equities. The funds may issue their own debt to obtain leverage. They may also issue
different classes of shares with different entitlements to income or capital receipts from the underlying
investments.
CP (Commercial paper) conduit.
A SPV that issues CP backed by financial assets originated by one or more sellers. They are generally
supported by liquidity facilities provided by their sponsor or a third-party bank.
DPC: Derivative product company.
A bankruptcy-remote structure that houses credit risk from long-dated derivative transactions. They
are typically wholly-owned subsidiaries of financial services companies. In general, DPCs sit between
their sponsor and an external counterparty in derivative transactions and protect the counterparty from
the potential default of the derivative seller (the sponsor).
Monoline insurance companies.
Monoline insurance companies provide protection against a specific type of risk (typically credit risk).
Originally developed in the 1970s to provide US municipal bond holders with credit guarantees (or
"wraps"), over the past few decades they have diversified into the ABS and CDO markets (particularly
the highly-rated senior tranches).
SIV: Structured Investment Vehicle.
A SPV that funds a diversified portfolio of highly rated assets by issuing short-term commercial paper,
medium-term notes etc. In general, there is a maturity mismatch between their assets and liabilities.
They aim to generate a positive spread between their return on assets and funding costs.
SPV: Special purpose vehicle.
A bankruptcy-remote company created for the sole purpose of acquiring assets or derivative
exposures and issuing liabilities linked to these assets. Also known as a special purpose entity.
Diagram 1: Interlinkages between financing vehicles
Commercial Commercial paper paper conduit conduit (e.g. (e.g. SIV) SIV) CLO CLO LBO'd LBO'd company company
Leveraged Leveraged
loans loans
Commercial Commercial Senior Senior Leveraged Leveraged
paper paper AAA AAA loans loans
Senior Senior Corporate Corporate
CDO CDO assets assets
Mezz/secon Mezz/secon
tranches tranches
d d lien lien debt debt
HY HY bonds bonds
Mezzanine Mezzanine
Mezzanine Mezzanine
tranche tranche
Equity Equity Equity Equity
Equity Equity
HY HY bonds bonds
REAL REAL
Mezz Mezz SF SF CDO CDO HEL HEL ABS/CMBS ABS/CMBS
CDO2 CDO2
ECONOMY ECONOMY
ECONOMY ECONOMY
FINANCIAL FINANCIAL
CDO CDO
Senior Senior
Senior Senior
mezzanine mezzanine
tranches tranches
Mezzanine Mezzanine
Senior Senior
Equity Equity
BBBrated BBBrated
Mortgages Mortgages
HEL HEL ABS/ ABS/ Mezzanine Mezzanine
CPPI CPPI on on CDO CDO equity equity
(often (often BBB-) BBB-)
CMBS CMBS
or or
Principal Principal CDO CDO
synthetic synthetic
Mezzanine Mezzanine
protected protected equity equity NIM NIM
Equity Equity
notes notes tranches tranches
Equity Equity