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Armageddon Part Two: Securitization Is Too Big to Fail -- Seeking Alpha
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The important point is from 2000 to 2007 about $14 trillion of securitized debt was created and sold, about half of that was sold to foreigners. By contrast, $4.5 trillion of Treasuries were sold (40% to foreigners). The securitization pipeline to the debt used to lubricate the US economy AND to foreign exchange to help finance the endemic current account deficit, is now blocked. It is highly unlikely that it can be substituted by selling Treasuries.
If either securitization is not fixed or an alternative is not found, some hard "readjustments" may be in store, Armageddon Part Two perhaps?
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Is the U.S. Style Securitization Model Dead? -- Seeking Alpha
According to The Economist, currently approximately $8.7 trillion of assets are financed worldwide by securitisation; they didn't say how much of that is in Europe or USA or whether that is face value or mark-to-market.
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According to The Economist, currently approximately $8.7 trillion of assets are financed worldwide by securitisation; they didn't say how much of that is in Europe or USA or whether that is face value or mark-to-market.
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How Banks Played the Leverage "Game" | vox - Research-based policy analysis and commentary from leading economists
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1. How could excessive leverage and aggregate risk get built up to such a scale in a financial sector that is so heavily regulated?
2. In particular, how and why did capital adequacy requirements fail in their stated job of limiting bank leverage and risk? -
While credit risk transfer may have economic merit as a risk-transfer tool, its "dark" side is that many of its incarnations may have been clever innovations of the financial sector to arbitrage regulation. Such regulatory arbitrage took two principal forms: first, a setting up of asset-backed commercial paper (ABCP) "conduits" (and its sister concerns such as "SIVs") by banks, and, second, a significant retention by banks of AAA-rated asset-backed securities.
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Why Securitization Is Necessary -- Seeking Alpha
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Securitized products have helped finance between 30–75% of lending in various markets and a total amount of $16 trillion. In the credit card sector, most banks securitized roughly 50–60% of their managed assets.
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Securitization: Advanta and the Fiction of True-Sale | The Big Picture
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The solution is simple. Regulators simply need to enforce their existing rules. If a bank is selling assets with recourse, the bank has to hold capital against those assets as if they are on-balance sheet. Securitization is simple leverage. Securitization allows banks to borrow against their assets and increase their returns. None of this is rocket science. Given the lack of interest, however, it may take a few more failures to get meaningful regulatory changes.
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Fixing the crisis: Two systemic problems | vox - Research-based policy analysis and commentary from leading economists
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- The general price level under present monetary arrangements, nor
- The overall level of leverage in the financial system.
- The price level must be stabilised by monetary policy.
- Leverage needs to be constrained by regulation.
The world of finance is a multidimensional system. In most dimensions, it works like the bread market, i.e. with negative feedback mechanisms. But in two important dimensions it does not. Market forces do not stabilise:
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When leverage is rising all around with everyone buying on credit, everyone is also merrily making money. Profits reinforce the process. Meanwhile, securitisation of loans and credit default swaps serve to obscure rising risk. Competition forces even those firms and individuals who realise that risk is rising to follow along or else be pushed out of the game altogether. A loan officer who does not lend, a risk manager who does not go along, a manager whose bank branch does not grow will all be under threat to lose their positions. The pressure to run with the herd becomes hard to resist. In this stage of the process, opposition to government interference with “free enterprise” will be fierce and almost universal. But risk is constantly increasing and the financial system as a whole becomes steadily more fragile until eventually it is so fragile that when it finally breaks it can be difficult to identify what exactly made it happen.
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Munich American Reassurance Company (MARC) - Life and Health Reinsurance
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The primary factors affecting credit quality of credit card receivables are card issuer underwriting standards and marketing methods; servicer quality; seasoning; geographic concentration; and economic conditions. Since credit card receivables are unsecured, the strength of an issuer’s underwriting criteria is critical to default performance. The method of account generation is also important. For example, a bank soliciting its own customer base may be expected to produce a more creditworthy pool of accounts than a general direct-mail campaign. Servicing quality also has a substantial impact on defaults, as a servicer that aggressively handles delinquent accounts reduces the likelihood of default. Resolving delinquencies early is important, since recoveries on unsecured card receivables are generally fairly low. Seasoning typically leads to stable default rates. In terms of geographic concentration, the more localized a pool of loans, the greater the risk if the region experiences an economic downturn. Defaults are highly correlated with unemployment and bankruptcy filings, so general economic conditions are important as well.
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