Home -> Law Blog Directory -> Personal Injury Law Blogs -> Des Moines Personal Injury Lawyer

Personal Injury Law

: Des Moines Personal Injury Lawyer

FINANCIAL MISCONDUCT: What is securitization or loan magic?

By Steve Lombardi

In very simple terms securitization is the conversion of loans to 'stocks' that can be sold on the stock market as an investment.

To explain securitization let's start with the originator. If you've taken out a home mortgage you've probably paid an originator fee. The originator can be a bank or lender that makes loans to people or corporations and other business entities. The loans could be people like you and I who buy cars, trucks and houses. Loan payments are cash flow. Whoever owns the loan, the paper, owns the right to receive the loan payments or cash flow. Holding or owning loans requires lenders to maintain a certain amount of capital, money and assets, as a percentage of the value of loans. Meaning (as way of an example) if you lend $1 million you might have to have $100,000 in cash in your (reserve) accounts. This reserve maintains the integrity of the banking system to be able to cover bad loans.

Banks or lenders might wish to convert loan payments to an immediate lump sum of cash; and that is where securitization can help them do it legally. The lender takes its credit sensitive assets (loans) and using securitization removes these assets from its balance sheets to obtain cash and to avoid capital requirements. This conversion is liquidity; freeing up cash to make other loans and earn fees.

The greatest game in America today isn't baseball but risk and liability avoidance by corporations. Liability avoidance is about enjoying the wealth without assuming the responsibility of making a mistake.

Here are the 3 ingredients you need in a securitization:

1. Pooling of assets – credit sensitive assets
2. Transfer the credit risk. De-linking the credit risk from the loan originator.
3. Tranches of liabilities.

Introduction and simple explanation of securitization.

http://www.youtube.com/watch?v=ZYmRn6H80qs

Pools of loans that are held in a separate company

What is a securitization?

http://www.youtube.com/watch?v=Z8kCQkfblzY

Originally posted at InjuryBoard by Steve Lombardi

Full post as published by Des Moines Personal Injury Lawyer on April 15, 2009 (boomark / email).