To make partnerships work, there must be a shift in orientation from past to future. A past orientation, just like past experience, is helpful to the partnership only to the extent that it can inform us about accomplishing new tasks. When learning something new, you don’t want to throw out the baby with the bathwater. History teaches valuable lessons, and it’s important to remember them. Too often, however, people cling desperately to their experience and fail to move beyond even the Form Stage of Relationship Development. They refuse to give up the old—and yet, they cannot embrace the new. This is because of a very powerful human survival technique known as knowledge transference, or what I call mental maps. Here’s how mental maps work. Whenever we engage in a new relationship, the first thing we do is scan our personal data bank—our memory—for what we already know about the other person or group. From our memory we seek out past experiences we’ve had with them or people like them. A mental scan then produces a map that helps us decide how we want to approach this new experience.
Thus we base our decision on the recollected memory of what has happened to us in the past. This knowledge transference occurs whenever we transfer an opinion about one type of person or group to another.
Cash CDOs are collateralized by a portfolio of cash assets and the entire liability structure is used to fund the purchase of collateral. Synthetic CDOs transfer credit risk from the CDO issuer to CDO note holders through CDS. The synthetic CDO normally funds only a small portion of the notional value of the credit exposure. Therefore the weighted average cost of liabilities are much smaller for a synthetic CDO because of the unfunded super senior tranche (around 85–90 percent of the capital structure) which leads to a higher return on the equity tranche.