I still do not get it!!. What is meant by a Synthetic CDO SHORT position? (1)- Selling the security of the CDO. (2)- selling insurance on the referenced Synthetic CDO mortgages? In Other words, How did IKB ( the German bank) lose money in the Abacus deal?!
Synthetic CDO is a contract for difference that references a security that doesn't exist. So, shorting synthetic CDO would work in the following spirit. First, the contract defines a pool or a few pools of subprime mortgages. Then the payout is linked to this pool appreciating or depreciating. If the pool apreciates the "shorting" party pays money to the "long" party and vice versa. The size of the payout is based on the estimated value of the undrlying mortgage pool. 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.
The buyer of the synthetic CDO gets premiums for the component CDS and is taking the "long" position, meaning they are betting the referenced securities (such as mortgage bonds or regular CDO's) will perform. The seller of the synthetic CDO is paying premiums and is taking the "short" position, meaning they are betting the referenced securities will default. The seller receives a large payout if the referenced securities default, which is paid to them by the buyer. http://en.wikipedia.org/wiki/Synthetic_CDO
It is pretty close to (2)... except short CDO means buying insurance. IKB was long CDO (as they sold insurance). So, when mortgage borrowers start defaulting (as nutmeg suggested), IKB (who sold protection) is loosing money.
It would have been more helpful if you have posted a link to a thread that discusses what happened in greater detail. No offence intended.
in another words, the shit is like red or black on the roullette wheel setup by the casino , but comes with nice names like syntheic some shit so it doesn't feel like gambling
So basically these investments are the same thing a degenerate gambler would bet on, but its given a fancy name so that the degenerate gamblers(or bankers) can look smart while doing stupid things.