Summary of A Primer on Securitization

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Editors Leon T. Kendall and Michael J. Fishman adapted these first-hand accounts of the early years of the securitization industry from a lecture series at the Kellogg School of Management. The contributions from financial service pioneers are the book’s greatest strength. They elucidate the economic and regulatory forces that made securitization a powerful, versatile financial tool. Each chapter stands alone, but the book does not follow a linear narrative. Caveat lector: these lectures were given in 1994, so the sections on current trends and future expectations are out-of-date. Hence, this primer doesn’t cover massive changes in financial regulation, an explosion in the types of asset-backed securities (ABSs), the popularity of derivatives or off-balance-sheet accounting to hide fraud. getAbstract.com suggests this book for those entering the financial services industry or for those who need background history. This does not tell you how today’s capital markets work, but it is an illuminating eyewitness account of yesterday’s.

About the Authors

Leon T. Kendall, professor emeritus of finance and real estate at Northwestern University’s J. L. Kellogg Graduate School of Management, is an economist with 30 years of experience at the Federal Reserve and the New York Stock Exchange. Michael J. Fishman is chair of the Finance Department and an editor at The Review of Financial Studies.

 

Summary

How Assets are Securitized

Securitization is the three-step process of packaging pools of non-tradable assets, issuing securities backed by those assets and selling the issue to third-party investors. First, investors purchase liquid assets with guaranteed cash flows. Then, issuers use the proceeds to fund new loans. Meanwhile, investment bankers pocket both management and trading fees, and borrowers reap the benefits of additional consumer choices and competitive loan rates.

However, securitization has its costs. Bypassing the traditional banking system made funding cheaper and more efficient, but it hastened the savings and loan industry’s collapse in the late 1980s. Nevertheless, the banking industry continues to thrive alongside securitization; in fact, banks have become enthusiastic issuers of and investors in securitized products.

Residential mortgage loans were the first securitized assets. Since the first issue of mortgage-backed securities (MBSs) in 1977, nearly every imaginable type of asset has been securitized. Auto loans and credit-card receivables were natural candidates. Although commercial mortgages presented some challenges, eventually they were...


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