> seems unlikely that they paid out as expecting considering we had record levels of default
Risk cannot be destroyed, but it can be moved. Tranching lets one control this. So if 95% of a pool default, and 5% don't, and you prioritize their payments to a premium tranche, that premium tranche will continue performing. (The specifics are more complicated [1].)
Risk cannot be destroyed, but it can be moved. Tranching lets one control this. So if 95% of a pool default, and 5% don't, and you prioritize their payments to a premium tranche, that premium tranche will continue performing. (The specifics are more complicated [1].)
[1] http://quantlabs.net/academy/download/free_quant_instituitio...