[xvector]

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.

(o1)

[hinkley]

Having flashbacks of The Big Short.

[bdndndndbve]

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.

[wbl]

Ever since the first copper merchant took inventory risk senior and junior tranches have existed.

[mattmaroon]

I this case it’s just one company that everybody knew was risky going in at least.