The Business of Investment Banking

By K. Thomas Liaw | Go to book overview

6
Asset Securitization

Asset securitization is a process of packaging illiquid individual loans and other debt instruments into liquid securities with credit enhancements to further their sale in the capital markets. Investment bankers' creativity has been the driving force behind the powerful revolution in a new era of structured finance. Securitized financing is one of the ways the global marketplace has grown, and has played an important role in the development of the derivatives market. Securitization generates fee income for bankers and provides them additional trading opportunities. Asset types used in securitization include mortgages, auto loans, credit card receivables, equipment leases, junk bonds, and tax liens. This chapter first describes the development of the market, which highlights how Wall Street responded to the challenges with incredible innovative thinking. Subsequent sections cover the major types of asset-backed securities. FASITs (financial asset securitization investment trusts) became effective on September 1, 1997, and are likely to be one of the dominant vehicles in asset securitization. An understanding of FASIT is required of bankers.


MARKET OVERVIEW

Asset securitization—the selling of securities backed by the cash flows from a pool of financial assets—has revolutionized the way businesses are financed. It provides businesses with access to new sources of capital at lower costs, even when upfront analysis, structuring, and credit enhancement costs are factored in. Also, securitization provides a crucial source of funding for companies with limited access to other forms of credit because asset-backed securities (ABS) are rated on their own merit, independent of the issuing company's financial standing. The revolutionary process first began with mortgage pass-throughs. Issuance of agency mortgage securities increased from $269.2 billion in 1995 to $370.5 billion in 1996. Issuance of agency MBS recorded a slight decline to $368.0 billion in 1997. Other asset-backed securities totaled $185.1 billion in 1997 and $151.3 billion in 1996, up from the $107.9 billion issued in 1995. The upward trend is expected to continue. At yearend 1996, the outstanding volume of agency mortgage-backed securities (by GNMA, FNMA, and FHLMC) totaled $1.740 trillion and the total amount outstanding for major types of credit was at $398 billion. By yearend 1997, the outstanding agency mortgage securities increased to $1.83 trillion, and the amount for major types of credit reached $490.0 billion. Table 6.1 presents outstanding volume for both from 1990 to 1997.

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The Business of Investment Banking
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Preface vii
  • Acknowledgments ix
  • 1: Investment Banking in Global Capital Markets 1
  • 2: Venture Capital Markets 9
  • 3: Mergers and Acquisitions 27
  • 4: Stock Underwriting 47
  • 5: Underwriting Fixed-Income Securities 72
  • 6: Asset Securitization 94
  • 7: Foreign Listing on Wall Street 111
  • 8: Euromarkets and European Markets 125
  • 9: Japanese Securities Markets 148
  • 10: Emerging Markets 167
  • 11: Trading and Trading Techniques 185
  • 12: Repurchase Transactions 203
  • 13: Financial Engineering 222
  • 14: Money Management 241
  • 15: Clearing and Settlement 261
  • 16: Securities Regulation and Ethics 275
  • 17: Investment Banking Trends and Section 20 296
  • Chapter Notes 309
  • Glossary 315
  • Index 325
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