Tuesday, August 25, 2009

A Must-Read on Securitization

. Tuesday, August 25, 2009

Here. One part I liked:

Finally, I'm consistently stunned at people's belief that, going forward, securitization is just a bad idea. That belief is akin to thinking that all stocks are bad after a stock market crash. The securitization market performed without grave incident for decades. The reason it went bad over the past few years was not because of securitization -- it was because of bad collateral. Had real estate not been overvalued, the market would have continued to function normally.

And in the future it should continue to function. This can be seen through other asset-backed securities not tied to mortgages that haven't seen treacherous losses. Such deals include stuff like auto loan-backed securities from prime issuers like Honda or Nissan. In a recession this bad, some with car loans might go delinquent or default, but the cushion in the deal should account for most of that. The collateral was strong enough that the rating agencies' assumptions worked.

Read the whole thing. The gist is that banks did their job relatively well, but ratings companies and institutional investors didn't. I suppose the point is arguable, but the fact remains: banks met the standards for AAA ratings that were given to them. If those standards failed, blame the standards and those supposed to maintain them, not the banks. This should give pause to those who think we can regulate our way out of future crises.

Say what you will about McMegan, the Atlantic's business coverage has been superb since she became editor. I have the whole Business channel in my RSS feed, and those authors often out-perform their peers at WSJ or anywhere else.


A Must-Read on Securitization




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