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As Promised

He is still a believer in his creation, despite being sucked down in the subprime vortex riding Novastar. caveat emptor.

As Promised

. . . the description I hit upon (ca 1985) to describe what I was doing was “financial engineering.” As far as I know, I was the first person to describe my profession with that phrase. Ten years later, there were business schools offering that as a major, but I don’t think they had any deal structurers teaching the courses.

This chapter, and the next, will show how I did that job.

Chapter 12

Three Tools is All It Takes

This chapter presents an overview of the three basic methods of tranching for asset-backed securitizations, and provides a conceptual foundation for understanding how securitization allocates risk. For the individual or investment professional wishing to explore each method in depth, the overview is followed by an in-depth examination of each tranching technique. The text quotes extensively from a chapter I wrote for the 2006 Euromoney International Debt Capital Markets Handbook.

. . .

Over the years, literally thousands of unique structured deals have been launched in the securitization market, with almost every imaginable underlying source of cash flows “feeding” the various bonds in the structures. To date, every bond type and bond structure has been made by some combination of these three structuring operators: time tranching, credit tranching and coupon tranching.

The success of securitization and structured finance comes from the power of these three structuring techniques to custom-tailor investments for a wide array of investors.

Banks may need safe, short maturity fixed rate bonds that match up with CD’s they’ve issued or they may need floating rate bonds to match up with their interest bearing checking accounts. Hedge funds need to offer the kind of high yields they can get from inverse floaters or from taking extra credit risk. Life insurance companies need bonds that won’t get paid off too soon.

Each can get what they need when the securitization market is working the way it should.

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