Bernanke goes to the barber for the regular haircut.

As usual for barbers, they engage their clients in conversation while cutting hair. But this time, the barber started talking about securitization. "Mr Chairman, what are you doing to promote securitization?", and so on. Bernanke shooed him, but he kept on pestering about securitization.

Anguished, Bernanke says: What do you know about securitization to talk all this rubbish?

The barber said he knows nothing. "All I am doing is my job. As I talk about securitization, your hair straightens upwards. Which makes it easy for me to cut!".

Tim Congdon's column in The Telegraph, 29th Aug 2007: Investment bankers have much in common with celebrity chefs. A good cook adjusts the ingredients in a recipe to alter the flavour and improve the taste. Similarly, a top-notch investment banker alters the composition of the assets in a financial instrument or a securities portfolio in order to suit the risk preferences of his clients.

Some customers want the stodgy but safe performance of cash, others enjoy the spice of volatility that comes with mining stocks, yet others appreciate a sauce of extra return from derivatives. The art of investment management is to mix and match, to dice and marinade, the so-called "asset classes" - cash, bonds, equities, property and so on - into structures that are appetising to particular investors.

But high finance differs from haute cuisine in at least two ways. The first is that bankers are better paid than chefs, and the second is that the customers have more difficulty understanding the complexity and variety of investment products than they do in interpreting restaurant menus. Moreover, whereas a meal is digested once, an investment product can be recycled many times.

Lew Ranieri on the History of Mortgage Securitization

Who is Lew Ranieri? In the 1980s, Lew Ranieri is accredited by many as the one who really steered the mortgage securitisation market to make it a USD 3 trillion business for GMAC/Salomon. Lew is sometimes called the father of securitization and featured in The Liar's Poker. In the small interview below, Lew recalls how the mortgage securitization business grew in 1980s. Click here.

Lewis Ranieri was also featured in a Business Week special as one of the greatest innvators in finance over the past 75 years. See Business Week article here

SEC Chairman's speech at American Securitization Forum

Two sides of the Balance sheet

There are two sides of the balance sheet - the left side and the right side. On the left side, there is nothing right, and on the right side, there is nothing left!

Extracts from Future of New York, Business Week, 22 Oct. 2001: "In 1792, in order to fund the country's first public-federal debt, two dozen brokers and speculators gathered under a buttonwood tree on Wall Street to formalize a system of standard minimum fees for the buying and selling of securities. This was the beginning of the New York Stock Exchange; the market sold U.S. government securities, not for the last time, to British and European investors.

Two centuries later, Wall Street would hire mathematicians and physicists to break securities down into their derivative parts, thus stripping, reshaping, and streamlining the nature of finance, making it far more efficient and powerful. The securitization of debt instruments allowed them to be sold globally, not just domestically, spreading risk and thereby reducing it. By the 1990s, New York capital markets were the largest and most sophisticated in the world. New York built an equity culture for the entire country, with soaring stock prices generating enormous prosperity for America, Europe, and Asia.

It is no accident that the skyscraper came to define New York. To scrape the sky with the dreams and aspirations of men and women drawn from around the world is to define the very essence of the city. New York is the only metropolis in America that was built to be dense and crowded from birth."

Securitizations are all about guesswork. First, companies guess how much revenue they can expect at a particular time. Then they guess how much of that money they will need to back their bonds safely. Finally, they guess how much cash will be left over--and book that as profit. And guess what? Sometimes they guess wrong. So far, though, the bad guesses haven't permanently damaged the investors who have bought hundreds of billions of dollars' worth of asset-backed bonds. Investment bankers have done a good job of figuring out how much cash is needed to back the paper. And there has never been a default in any public asset-backed deal, rating agency executives say. But there is nagging evidence that the guesses could be more off the mark than most players in the market think. To this point, this has hurt companies that issue asset-backed bonds and their shareholders. For example, subprime home-equity lenders--the fastest-growing sector in the asset-backed market--have made terrible guesses about their expected profits and have seen their stocks crash as a result. The worry is that investors in asset-backed bonds may see problems. If the economy slows sharply, analysts fret, assumptions about loan losses could also prove incorrect. 

Securitisation means the issuance of marketable securities backed not by the expected capacity of a private corporation or public sector entity to repay, but by the expected cash flows from specific assets.

"Securitization is the substitution of more efficient public capital markets for less efficient, higher cost financial intermediaries in the funding of debt instruments."

- John Reed, former Chairman, Citibank

This is a letter to the Editor that appeared in the Financial Times: an interesting comment on the securitization of tax receivables by Italy (see News page for details): 
From Mr Robert L. Greenaway. 
Sir, The issue by the Italian government of an "unpaid tax" bond is indeed a landmark transaction, but it is merely a brilliant new slant on a theme that is as old as time. 
In 146BC, the Roman Republic was bequeathed a prosperous kingdom (in modern-day Turkey) which became the Province of Asia Minor. The Roman Senate was reluctant to create a bureaucracy to collect the revenues of their new and distant inheritance. Rather, the Senate resolved that the collection of the projected taxes should be auctioned in Rome to the highest bidder, invariably a consortium or company, who then sent in their thugs (known as Publicani - such as the reviled St Matthew) to do the collecting. 
Why should modern governments stop at securitising past, unpaid taxes when they can auction future revenues too? A cursory glance into Roman history books will reassure the Italian government, and any other that cares to pay attention, that startlingly effective results are there to be had. Bids of more than 100 per cent of projected revenues can be achieved by a Treasury auction, if the successful bidder/collector has confidence enough in the ruthlessness of his thugs. And all the opprobrium of ruthless collection falls on shoulders other than those of the emperor - surely the ultimate stealth tax. 
I would not presume to ruin the story by revealing how it unfolds. Gibbons' Decline and Fall of the Roman Empire remains a rewarding read even for Treasury officials. 
Robert L. Greenaway, 36 Calle Lluca, Javea, 03730 Alicante, Spain 

Here is a funny piece on stock market news from http://www.mhhe.com/business/finance/rwj/adopter/humor1.html

Wether bonds (to know more about weather bonds - click here ) seek to convert weather changs into a security. The following cartoon appeared in Wall Street Willard and tells us how would the weather channel on the TV look like, when weather bonds become the order of the day: 
 

If securitisation deals with risk management, see how risk could be managed in much easier way.
One risk risk manager, new to his job, got three magical envelopes from a risk guru. Each of these envelopes were to be opened when an unmanageable risk event occured, advised the guru.
When the first risk event happened, the manager opened the first envelope. It said: "Blame it on your precessor". So he did, and every one agreed and forgot.
The next risk event happened, which was more serious than the first one, and the manager opened the second envelope which said: "Re-organise". So he suggested a re-organisation. Everyone agreed, though a bit disgrunted.
Soon, the third risk event happened and it was devastating. The manager opened the third envelope, in which it was written: "Now, prepare three envelopes!".
[Based on http://www.griffincom.com/riskVue/ls.htm]

5 Reasons why the Bill-Monica scandal was actually a securisation deal
1. The "up-front" was attractive.
2. A few did it; lot many enjoyed reading about it.
3. Instant gratification overtook long term consequences
4. It was tempting; but involved too many complicated legal issues.
5. At the end of the day, it was exploiting the "hole in the system".
By Vinod Kothari

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