The three junior tranches would all have to be erased before the senior tranche's insurer loses money.

FORBES: Buy Some Insurance

Many CDOs are backed by subprime loans and other toxic waste and are divided for investors into senior and junior tranches.

FORBES: Magazine Article

The subordinate or junior tranches will absorb all of the losses, up to their value before senior tranches begin to experience losses.

FORBES: Introduction To Asset-Backed And Mortgage-Backed Securities

The way the CMO is structured, it could likely lose 55% of its value and tranches junior to Feltus' would have to eat the entire loss.

FORBES: Yes, there is a market for toxic mortgages.