Venue: Koločep, Croatia. Date: To be announced.

Course Description and Objectives

Securitization and structured financial products are commonly thought as the main culprits of the current global financial meltdown. While such views have merits, it is also true that these products are here to stay, since they, properly structured and regulated, are likely to continue to play a very important role in the world financial system. Securitization is one of the major innovations in modern financial markets.  Securitization creates the opportunity to transform highly illiquid securities such as mortgages, auto loans, credit card receivables, equipment and real estate leases, and third-world debt into more liquid financial instruments.  Securitization also allows intermediaries to segment the risk and term-structure characteristics of assets into a wide variety of alternative bond structures and thus expand the domain of suitable investors. 

This course will consider the basic mechanics of the securitization of receivables such residential and commercial mortgages, credit cards, leases, credit default swaps, and catastrophe risk and the second stage restructuring of some of these securities into collateralized debt obligations.   We will discuss the economic foundations of securitization that are likely to sustain the continued growth of these markets, despite the significant corrections that have arisen from the collapse of the subprime mortgage market in the United States, as well as numerous outstanding problems related to valuation challenges, illiquidity, agency and adverse selection that may impede this growth. At the end of the course you should be able to fully understand the following topics: introduction to asset backed securities markets, the economics of securitization, structuring for multiple risk exposure, role of rating agencies, alternative ABS products.

Expected Outcomes

At the end of the course you should be able to understand the following:

• Structure of mortgage and asset backed markets
• Important economic role that securitized products play
• Risks that investors in such securities are facing
• Alternative ABS products
• The role of rating agencies
• What went wrong with structured products and how the crisis propagated
• Discuss regulatory and market microstructure changes needed to restart the market in a safer mode

Who Should Attend

 

This course is designed for structured capital market practitioners, commercial and investment bankers, investors, and regulators.  The course will be taught as a high-level introductory course and is intended for individuals with some familiarity with bond markets.  It will not require any understanding of advanced quantitative methods that are the foundation of fixed income analytics.  Instead, the course should provide a practical working understanding of the purpose of asset-backed securitization and the risk management challenges it is designed to address. 

Course Outline

Day 1

• Unique features of asset-based securities
• What went wrong
• Installment loan basics
• Pass-through security structure
• Prepayment risk
• Collateralized mortgage obligations (CMO)
• Security structure.  -  Mini case: Reading the CMO prospectus and evaluating cash flows and risk.
• Pooling and tranching risk management objectives
• The limitations of alternative instruments (debt and equity)
• The theoretical foundations of securitization
• Asymmetric information in the ABS markets
• Pooling, tranching, and enhancements
• FirstPlus mini case
• Bank regulation trends

Day 2

• Default, extension, and prepayment risk
• Correlation, default workout positions, commercial mortgage backed securities (CMBS)
• Collateralized debt obligations (CDO)
• Credit default swaps (CDS)
• Synthetics, cash flow structures for CDO securities, and models of default correlation
• Mini case: the CMBS and CDO prospectus
• Structure of rating agency industry
• The fundamental role of rating agencies for securitization markets
• raditional methods for risk rating
• Stress-test methods of risk analysis
• Implications of rating agencies for security design -  Bistro mini-case.
• Presentation by a practitioner

Day 3

• Auto loan and credit card receivables
• High risk assets
• ABX indexes
• New frontiers in securitized products.