First-loss

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Of potential claims against a given pool of assets, the first one up against the wall when the revolution comes. This is to do with priority, preference and capital structure. The first one for the down-trou will be one whose claim is most subordinated. That will be the common shareholder, if there is one, and if not (in, say, a CDO or a structured note of some sort) it will be the one bringing up the rear in the security waterfall. That will usually be the Noteholder or, if there are several tranches of Notes, the most junior, most deeply subordinated, ones.

It is only once the first-loss piece has been wiped out that the fellow holding the second-loss piece has anything to be worried about. This was a great source of comfort, in the lead-up to the global financial crisis, for those holding the most senior tranche of notes. The estimated loss on a portfolio of mortgages is about 5%, these people would think, and I have four tranches of notes below me, absorbing up to 40% of the losses of this portfolio. So I’m, literally, safe as houses!

And so he was: safe as the hundreds of crappy, leaking, triple-mortgaged prefabs situated on recently reclaimed Nevada desert that comprised his portfolio.