I don't Get it?!

[cigarno]

Thank you for all for your replies...appreciate it.

if what Leed said is true "The basic idea is the same as for equity index futures. The underlying equity portfolio (index) is well-defined but neither the buyer nor the seller actually hold this portfolio. The future payout depends on how much the underlying portfolio (index) appreciates or depreciates."
So are you saying that IKB bank lost one Billion dollars because the price of homes that the syntactic CDO references drooped by one billion dollars?

 

[LeeD]

Quote from cigarno:

So are you saying that IKB bank lost one Billion dollars because the price of homes that the syntactic CDO references drooped by one billion dollars?

That's the basic idea! In fact IKB may have lost much more than the actual drop in home values because similar to index futures synthetic CDOs may come with reckless amount of leverage as standard (think of index value multiplier in futures).

P.S. Technically, the CDOs were linked to portfolios of mortgages, not homes. Hence the percieved creditworthiness of borrowers with self-declared income had its effect too.