First-loss: Difference between revisions

Of potential claims against a given pool of assets, the “[[first-loss]]” is 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 early shower will be he 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 [[tranche]]s 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, much less the “[[super-senior]]” guy sitting at the top of the pile, usually with a bogus [[Ratings notches|triple-A rating]]. This was a great source of comfort, in the lead-up to the [[global financial crisis]], for those holding the most senior [[tranche]] of the [[CDO squared]] products that, well, precipitated it. It become a greater source of comfort, later, for everyone else with a taste for ''schadenfreude''.

And so they were: as safe as the thousands of crappy, leaking, triple-mortgaged prefabs located on remote strips of recently-reclaimed Nevada desert that made up all most all of their portfolios.