Escolar Documentos
Profissional Documentos
Cultura Documentos
The views expressed here are my own and do not reflect the opinions of the Federal Reserve Board of Governors or its staff.
Todays Talk
Overview of securitization Looking back What went wrong?
Excessive complexity Leveraged exposure to systematic risk Model error
Looking forward
Alternatives to securitization Securitization going forward
Heitfield -- Federal Reserve Board 2
Overview
Assets
Liabilities
Super Senior
Liabilities
Pass-through
Structured
Goals of securitization
Separate debt funding from risk bearing
Senior tranche investors put up most of the capital to fund assets Junior tranche investors bear most of the credit risk
Risk diversification
A single structured credit deal may be backed by hundreds or thousands of loans Cash flows for large asset pools may be easier to predict
Regulatory arbitrage
Financial institutions can move assets off balance sheet while continuing to be exposed to much of those assets credit risk
Heitfield -- Federal Reserve Board 6
1,200
1,000
800
600
400
200
2005
2006
2007*
2001
2002
2003
2005
2006
2007*
* 2007 vintage includes deals completed through September Source: Standard and Poors
100
90
80
70
60
50
40 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Source: MarKit
2007 Vintage
2006 Vintage
Aa Initial Rating
Baa
10
11
12
Complexity
Tasman CDO
$300 million mezzanine-hybrid CDO2 Deal date: January 11, 2007 Lead Underwriter: UBS Capital Structure: 7 debt classes maturing in March 2047 Assets: 64 CDO notes of various types
14
Baa2 Ba1 NR
A2 Senior Secured 19% A3 Secured 6.66% B & C Mezzanine Secured 5.33% U.S Subordinated 4% 15
CAMBER-8 CAMBER-8
(CDO2) (CDO2) 0.72% 0.72%
AQUARIUS-4 AQUARIUS-4
(CDO2) (CDO2) 0.58% 0.58%
PINE-5 PINE-5
(CDO2) (CDO2) 0.004% 0.004%
MAY-5 MAY-5
(CDO2) (CDO2) 0.94% 0.94%
AQUARIUS-5 AQUARIUS-5
(CDO2) (CDO2) 0.19% 0.19%
17
20 A1S 15 A1J A2 A3 B C
Baa
10
Caa
Loss rate for a large pool of securities has less dispersion overall, but systematic factors play a bigger role
Heitfield -- Federal Reserve Board 20
Large asset pools may not be safer under systematic stress conditions
Loss Exceedance Probabilities (%) Num. of Bonds 20 200 20 200 Loss > 5% 18.6 16.3 67.2 81.2 Loss > 10% 6.3 3.1 39.4 37.5 Loss > 15% 2.0 0.5 16.5 11.6
Unconditional
Systematic Stress*
21
Heitfield -- FederalEL assumes 99th percentile draw of a systematic risk factor. Reserve Board Stress
22
Model risk
24
25
Conclusions
To a large degree, the potential for dramatic falls in ratings and valuations was baked in to the securitization process
Complexity of exotic resecuritization deals made it difficult to evaluate risk exposures Pooling assets and structuring liabilities ensured that senior tranches would perform well under most circumstances, but would all fall together Credit rating and valuation models depended on limited data could not accurately assess the likelihood of future losses
Heitfield -- Federal Reserve Board 26
Looking Forward
Figure extracted from Best Practices for Residential Covered Bonds, US Treasury Dep.
29
Covered bonds
US regulators are promoting use of covered bonds to finance mortgage lending (July 2008)
FDIC clarified receivership treatment of covered bonds Treasury articulated best practice standards for covered bonds
Rating agencies and other gatekeepers have become much more conservative Some structured finance products including resecuritizations such as ABS CDOs and CDO2 may no longer be viable
Heitfield -- Federal Reserve Board 31