Mfs imp


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Mfs imp

  2. 2. SECURITIZATION<br />Securitization is a structured finance process that involves pooling and repackaging of cash-flow-producing financial assets into securities, which are then sold to investors. <br />The term "securitization" is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities<br />
  3. 3. Cont…<br />Securitization often utilizes a special purpose vehicle (SPV), alternatively known as a special purpose entity (SPE) or special purpose company (SPC), in order to reduce the risk of bankruptcy and thereby obtain lower interest rates from potential lenders.<br />
  4. 4.
  5. 5. WHAT HAS SECURITIZATION DONE?<br /><ul><li>Securitization creates an incentive problem with respect to collecting soft problem.
  6. 6. Price investors offer for a loan(or pool of loans) must depend only on the associated hard information.
  7. 7. Soft information and perforce uncontractible.
  8. 8. Moral hazard of the problem for the lender
  9. 9. Lender has incentive to pool borrowers: loans to all borrowers who generate the same hard information signal, though soft information might have improved screening.</li></li></ul><li>Cont..<br /><ul><li> Statistical model relied entirely on hard information variables
  10. 10. Possible failure to account for change in relationship between observable borrower characteristics and default likelihood caused by a fundamental change in lender behavior
  11. 11. Defaults systematically increase in set of borrowers for whom soft information is valuable.</li></li></ul><li>
  12. 12. SECURITIZATION WITH SUBPRIME CRISIS<br /><ul><li>The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others
  13. 13. Starting in Wall Street, others followed quickly. With soaring profits, all wanted in, even if it went beyond their area of expertise.
  14. 14. Banks borrowed even more money to lend out so they could create more securitization. </li></li></ul><li>Cont..<br /><ul><li>Some investment banks like Lehman Brothers got into mortgages, buying them in order to securitize them and then sell them on.
  15. 15. Some banks loaned even more to have an excuse to securitize those loans.
  16. 16. Some banks evens started to buy securities from others.
  17. 17. Collateralized Debt Obligations, or CDOs (even more complex forms of securitization) spread the risk but were very complicated and often hid the bad loans. </li></li></ul><li>Cont..<br /><ul><li> High street banks got into a form of investment banking, buying, selling and trading risk. Investment banks, not content with buying, selling and trading risk, got into home loans, mortgages, etc without the right controls and management.
  18. 18. Many banks were taking on huge risks increasing their exposure to problems. </li></li></ul><li>Impact of securitization<br /> When people did eventually start to see problems.<br /><ul><li> Confidence fell quickly
  19. 19. Lending slowed
  20. 20. Assets were losing in value so lenders wanted to take their money back.
  21. 21. Investment banks had little in deposits; no secure retail funding, so some collapsed quickly and dramatically.
  22. 22. Banks even with large capital reserves ran out, so they had to turn to governments for bail out.</li></li></ul><li>conclusion<br />This post discusses the questions, the details about the crisis. <br /><ul><li>This down cycle has much more to go, still in its earliest stages.
  23. 23. The de-leveraging of US households has just began. Purging of excess mortgage debt is the first step, credit card and auto loans are next to go.
  24. 24. The global rebalancing process has barely started.
  25. 25. How far will the U.S. government go in socializing the excess debt?</li></li></ul><li>Cont..<br /><ul><li>Will our markets recover from the extensive manipulation by the US government? 
  26. 26. How long will U.S. government retain ownership? 
  27. 27. A short-term fix followed by a quick return to private ownership. Or long-term ownership?
  28. 28. How much wealth will be transferred from the taxpayers to insiders by this process? </li></li></ul><li>THANK YOU<br />