Customer Quote by Michael Lewis
““Take a typical three-hundred-million-dollar CMO. It would be divided into three tranches, or slices of a hundred million dollars each. Investors in each tranche received interest payments. But the owners of the first tranche received all principal repayments from all three hundred million dollars of mortgage bonds held in trust. Not until first tranche holders were entirely paid off did second tranche investors receive any prepayments. Not until both first and second tranche investors had been entirely paid off did the holder of a third tranche certificate receive prepayments.””
About This Quote
Source Book: Liar's Poker by Michael Lewis, 1989
The quote illustrates how structured finance splits a large loan into tiers, where senior investors get paid first and junior investors must wait for earlier tiers to be fully repaid.
In simple terms: Senior investors are paid before junior ones.
Key Takeaway
Understand the hierarchy of risk in structured deals.
Themes
finance
risk
hierarchy
investment
mortgage
Mood
cautious
analytical
Type
explanatory
financial
When to use this quote
- real estate financing
- mortgage-backed securities
- investment analysis
- risk assessment
Key Concepts
senior tranche
junior tranche
prepayment
cash flow
trust
Questions to Reflect On
- How does tranche hierarchy affect investor risk?
- What safeguards exist for junior tranche holders?
A Different Perspective
Junior investors may receive little or no return if senior tranches consume all cash.
![“Crucial decisions are made, today as thousands of years ago, in terms of the intuitive guesses and preferences of a few men in positions of authority...[it is] quite likely that the fate of entire societies may be sealed by a series of avoidable mistakes committed by their leaders.” quote by Michael Lewis](https://sms4smile.com/quotes/img-quotes/a59/michael-lewis-705_decision-making_crucial-decisions-are-made-today-as-thou_16888.jpg)
