Embed Size (px)
Citation preview
FASRI Office HoursSecuritizations
Catherine Shakespeare
How does a securitization work?
Assets
Account Receivables A
Account Receivables B
Account Receivables C
Pooled
AAA Tranche
Mezzanine A
Retained Interest
Mortgage-backed Securities
What is a CDO?Collateralized Debt Borrowing
Mortgage-backed SecuritiesAssets
Mezzanine C(From another securitization)
Mezzanine B(From another securitization) AAA
Tranche
Mezzanine D
Residual
Account Receivables A
Account Receivables B
Account Receivables C
Pooled Pooled ABC
AAA Tranche
Mezzanine A
Retained Interest
CDO2
AssetsMortgage-backed Securities (MBS)
AAA Tranche
Mezzanine G
Residual
Collateralized Debt Borrowing
Collateralized Debt Borrowing
Account Receivables A
Account Receivables B
Account Receivables C
PooledPooled
ABC
AAA Tranche
AAA Tranche
Pooled
DEF
AAA Tranche
Mezzanine A
AAA Tranche
MezzanineD
ResidualRetained Interest
MezzanineA
Mezzanine B(from another MBS)
Mezzanine C(from another MBS)
Mezzanine E(from another MBS)
Mezzanine F(from another MBS)
What happens on when the cash flows disappear?
Assets
Account Receivables C
Pooled
AAA Tranche
Mortgage-backed Securities
Account Receivables A
Account Receivables B Mezzanine A
Retained Interest
Note: Indicates the default portion
Extends into the CDO marketCollateralized Debt Borrowing
Mortgage-backed SecuritiesAssets
Pooled Pooled ABC
AAA Tranche
Account Receivables A
Account Receivables C
Account Receivables B
Mezzanine A
Mezzanine B(From another securitization)
Mezzanine C(From another securitization)
AAA Tranche
Mezzanine D
Residual
Note: Indicates the default portion
Retained Interest
House of cards start to fall….
AssetsMortgage-backed Securities (MBS)
Collateralized Debt Borrowing
Collateralized Debt Borrowing
Account Receivables C
PooledPooled
ABC
AAA Tranche
AAA Tranche
Pooled
DEF
Mezzanine A
Account Receivables A
Account Receivables B
MezzanineA
RetainedInterest
Mezzanine B(from another MBS)
Mezzanine C(from another MBS)
MezzanineD
AAA TrancheAAA
Tranche
Mezzanine E(from another MBS)
Mezzanine F(from another MBS)
Residual
AAA Tranche
Mezzanine G
Note: Indicates the default portion
Residual
Asset Derecognition
• Asset sold for cash, seller has no further involvement
• Asset sold for cash, seller has a call option to repurchase the asset, option way out of the money
• Asset sold for cash, seller has a call option to repurchase the asset, option way in the money
• Firm has a call option to purchase an option never owned
Asset Securitization: Conceptual Issues
• What are the basic conditions for removing an asset from the books?~ Is failure to meet the definition of an
asset sufficient?– If not, is there a flaw in the
definition?~ Implications of answer
– Income statement – gain/loss– Balance sheet – don’t remove asset
cash received is a loan
Asset Securitization: Conceptual Issues
• Does ownership history matter?• Can part of an asset be derecognized?• Modifications introduced as part of the
transfer~ Derivatives or guarantee
– Derivative offsets risks but introduces a new source of risk (counterparty performance)
– Cash flows may come from sources other than the asset
• Should these differences affect the accounting treatment?
Asset Securitization: Conceptual Issues
• Is legal isolation required?• Does the order of the transactions matter?
~ Fixed price call option to repurchase a previously owned asset, versus the same option on an asset never owned
• Can pieces of an asset be sold?~ Strict control might say no, strict components would
say yes~ How would you divide the asset?
– Cash flows, risk• How does derecognition interact with the choice
of measurement attributes?
Asset Securitization: Possible Approaches
• Risk and Rewards~ Compare transferor’s exposure before and after the
transfer– Should we look at max exposure or expected exposure?
• Control~ Assets are placed beyond reach of the transferor and
creditors~ Transferee must be able to pledge/exchange assets
– Should we really look to the transferee to determine the transferor’s accounting?
• Components Approach~ Focus on the contractual pieces
– Every call put etc would be separately valued
