Slight simplification: Bonds aren't like stocks. For a given company, there is typically 1 common stock issue(perhaps multiple share classes FAANG-style for voting or maybe issued on different exchanges), maybe a preferred issue and then like 10+ different types of bonds, which are very different(typically, the shittier the company's financial position the bigger the difference between the senior/secured and the junior/subordinated debt).
Senior debt is basically either directly secured by specific assets/collateral or is the first to get paid out in case of a default. Junior debt is typically unsecured(no specific collateral) and goes after other, senior unsecured debt has been paid off.
When you hear about a company's credit rating, its usually the rating of the senior unsecured(so the "safest" bonds that aren't secured by specific assets).
It's part of breaking a loan into bonds, which is called securitization.
Suppose we divide the repayments into 5 bonds. If 20% of the money comes in, it goes to the first bond. Then the next 20% to the next, and so on. The later bonds are called subordinate - they only pay if the other ones already were paid off. Because they are riskier, the later ones aren't worth as much.
The actual rules are more complex than this toy example. But that's the basic idea. And this is how a risky loan is sold to different investors at different prices with different tolerances for risk/return.
They’re saying that the debt is structured with layers (tranches), where the top layers have added protections and get paid back first if there’s trouble, while the “subordinated” layers sit below them in priority.
“Extra levels of credit protection” means the tranches being sold to investors have features (e.g., senior ranking, collateral, covenants) that reduce default risk. Banks typically retain the subordinated (riskier) portion, which absorbs losses first, allowing the sold tranche to appear safer.
The problem in The Big Short was that lenders bundled many loans with correlated risk and advertised the resulting bundle as less risky. Because of the demand for these bundles they issued and bundled increasingly risky loans as time went on. Eventually when the market corrected all of these loans defaulted at the same time.
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