Friday, 1 April 2011

CASE 250 - Global Securitization and the Financial Crash

Inside Job - A new award winning documentary narrated by Matt Damon, pretty amazing stuff on how our governments and central and fed bankers have stolen well over £20 trillion off us the people in just the last 3 years and still carry on today

Asset securitization (legally stealing from the taxpayers who know very little about the banking system through various means) was one of the growth industries of the great bull market of the 1980s and 1990s. The concept of packaging up loans into legally isolated special purpose vehicles and then issuing tranches of bonds and just like sub-prime mortgages based on the asset pools first arose in the 1970s but really became a critical part of the global financial system in the decades that followed. As a credit multiplier, it freed up capital for banks and enabled the growth of new lending. The growth of residential mortgage securitization markets (RMBS) was followed by the development of commercial mortgage securitization markets (CMBS) and then auto leases and loans, credit card receivables, and even royalties on songs and turnstile receipts for sporting venues and football clubs. The inexorable multiplication of the value of assets securitized turned into a full-scale boom (and some would say bubble) in the early years of the twenty first century. New financial instruments emerged such as credit default swaps (CDS) and then synthetic hybrids such as CDOs, CLOs and CLO-squared instruments. Structured finance evolved into a veritable alphabet soup of acronyms.

The first strains of the credit crisis were felt in the last days of July and early days of August of 2007. Asset backed commercial paper markets, an obscure corner of the inter-bank liquidity apparatus but one on which many institutions relied on for their wholesale funding requirements, began to dry up. And so began the domino effect that led to the failure of the British bank Northern Rock and ultimately the collapse of giant financial institutions. When Lehman Brothers collapsed in September 2008, it almost seemed as if global financial capitalism had met its maker. Only massive government bail-outs of the banking sector in the United States and United Kingdom averted outright collapse. So the great lending drought was followed by the Great Recession. Secured loans dried up as banks did everything possible to reduce their exposure given their capital constraints. For a time it seemed that securitization was the first victim of the financial crisis, missing in action. Eventually, propped up by government schemes such as the TALF, the market re-emerged and the long journey back to financial health began for the sector. Securitization suffered a cardiac arrest, but the patient did not die and the market remains active forever endebting the people of the world.


A securitization is a financial transaction in which assets are pooled and securities representing interests in the pool are issued. An example would be a financing company that has issued a large number of auto loans and wants to raise cash so it can issue more loans. One solution would be to sell off its existing loans, but there isn't a liquid secondary market for individual auto loans. Instead, the firm pools a large number of its loans and sells interests in the pool to investors. For the financing company, this raises capital and gets the loans off its balance sheet, so it can issue new loans. For investors, it creates a liquid investment in a diversified pool of auto loans, which may be an attractive alternative to a corporate bond or other fixed income investment. The ultimate debtors—the car owners—need not be aware of the transaction. They continue making payments on their loans, but now those payments flow to the new investors as opposed to the financing company.

All sorts of assets are securitized:

auto loans
student loans
Sub-prime loans
credit card receivables
lease payments
accounts receivable
corporate or sovereign debt, etc.

Assets are often called collateral.
In a typical arrangement, the owner—or "originator"—of assets sells those assets to a special purpose vehicle (SPV). This may be a corporation, US-style trust, or some form of partnership. It is established specifically to facilitate the securitization. It may hold the assets—collateral—on its balance sheet or place them in a separate trust. In either case, it sells bonds to investors. It uses the proceeds from those bond sales to pay the originator for the assets.

Top 10 banks of 2011 in the world

1. Citibank
2. JP Morgan Chase
4. Bank of America
5. Credit Agricole Group
6. Royal Bank of Scotland
7. Mitsubishi Tokyo Financial Group
8. Mizuho Financial Group
10. BNP Paribas

Also check out these cases

CASE 219 - The Bank for International Settlements
CASE 210 - Central banks
CASE 052 - The banking system

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