留學生金融工程dissertation這是我曾經(jīng)做過的essay的一部分，可以讓你對我們學校的reference系統(tǒng)，什么是securitization, 以及我們的寫作風格有個了解。很明顯，我們不能照著文獻抄，需要總結(jié)各家的看法，以及提出自己的看法。Describe with diagram(s) (or flow chart(s)) how Securitization can be varyingly constructed. How can this funding technique varyingly distribute risk?

Securitization refers to a process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. The cash flows associated with the existing financial assets are used to service funding raised through the issue of asset-backed securities.
Diagram above shows the securitisation process of a mortgage-backed security, however it also reflects a general process of securitization. First, the financial assets, in this case mortgage loans are accumulate on the balance sheet and then reviewed on the basis of interest rates, liquidity and credit risk. Assets with similar characteristics are pooled together and sold into a special purpose vehicle (SPV). Then the trustee issues new securities to investors. Service manager is appointed to manage the cash flows: repayments from borrowers, known as inflows, and payment of interest and principal on securities issued by trustee – outflows. Received cash flows from the original assets are used by the SPV to repay interest and principal due on securities issued to investors
Securitisation transforms non-tradable risk factors into tradable financial securities with the goal of transferring external risks to capital markets. For example, if a bank issues a large loan and want to reduce its exposure to risk, it can choose to syndicate the loan. However, it will induce extra costs and the benefits of a potentially profitable lending relationship will have to be shared. Another option of reducing risks is Credit Default Swaps. Purchasing CDS allows the bank to reduce the default risks while still handling the loan on its own. Almost any desired risk portfolio can be created by a combination of various types of credit derivatives. If an investor wants to bear the default risks associated with specific company, but not the default risk related to the industry on the whole, he can purchase derivatives that would compensate the lender in the event of an industry downturn. (Partnoy and Skeel, 2006)
Partnoy and Skeel (2006) outline a number of reforms regarding disclosure and credit ratings that might help resolve some of the costs associated with securitised instruments.
With regards to disclosure Partnoy and Skeel (2006) argue that disclosure should with respect to credit default swaps (CDS’s) and collateralised debt obligations (CDO’s). In general credit derivatives are unregulated and fall within statutory exemptions of over the counter derivatives.
Firstly they argue that with respect to CDS’s , the ISDA should make all documentation in relation to credit derivatives freely available online implying that the ISDA should halt its practice of making market participants pay fees for documents. Secondly Partnoy and Skeel (2008) indicate that market participants should be demanded to publish credit derivative transactions through a service like SEC edgar service. The third reform in relation to disclosure they outline is that a pricing service for credit derivatives be centralised through broker services making historical prices accessible to the public and that credit rating agencies such as Standard and Poor’s make data about CDO’s available on their websites. The last reform they outline should be undertaken is for companies that are already reporting companies should include descriptions of the effects of credit derivatives in narrative piece of writing in management’s discussion and analysis of results and operations on their financial filings especially on their exposure to risk from credit derivatives. #p#分頁標題#e#
With respect to credit ratings, Partnoy and Skeel (2006) believe that opening credit ratings to competition should help resolve some of the problems associated with credit derivatives. Another reform they see as a positive one, would be for institutional investors, to outline the extent to which they rely on credit ratings in taking on investment projects and also outline why credit ratings are important in their decision to use CDS’s or CDO’s.

According to Professor Axel Weber, (President of the Deutsche Bundesbank and member of the Governing Council of the European Central Bank) how did (1) lending standards, (2) weakness in credit risk transfer and (3) overly optimistic assessment of structured securities lead to the current global financial crisis?
Professor Weber believes that the recent financial crisis was caused by a combination of factors, rather than by a single aspect. He indicates three main factors, which could have had less severe effects individually, but by interacting with each other caused serious distress to global financial system. These three factors include more relaxed lending standards, especially in the US real estate sector; weaknesses in credit risk transfer, especially in originate-and-distribute model; and overly optimistic assessment of structured securities.
First of the causes are lending standards that became more relaxed in the years preceding the financial crisis. In a number of countries, such as the US, it became possible and quite common to get a real estate loan with almost no capital and credit rating. These became known as ‘Ninja’ loans – no income, no job, no securities, no assets. However, such lending standards were not present in other countries, such as Germany, which made it harder to monitor the developments in the standards and assess the possible consequences and risks associated with them for the global financial market.
The lax lending standards were stimulated by increasing house prices, which led to the perception that such trend will continue and thus it is possible to lend against the future increase in the price of the house, and developments of innovative financial instruments that allowed the credit risk to be transferred from the bank to other investors. Professor Weber points out that for a while, it was perceived that securitisation and trenching allowed unstable individual loans loans to be converted to almost fail-safe securities. Although securitisation is an important feature of risk management and it can provide increased flexibility to financial markets participants, the risk is not eliminated at its core; it is merely transferred and can emerge elsewhere possibly in a concentrated form. This phenomenon was evident from a number of financial institutions, who were not participating in real estate lending themselves, but fell under the strain caused by these new, concentrated forms of risk.
Overly optimistic assessment of structured securities refers to the limited ability of the credit rating agencies to assess the default risk probabilities of various businesses. Prior to the financial crisis, it was generally assumed that mortgage-backed securities provided a premium over government bonds, while bearing a similar level of risk. After the meltdown of the US real estate market, there has been a lack of confidence in the financial sector, which restricted the distribution of liquidity on the interbank money market. The situation on the US mortgage market was further aggravated by complex innovative credit derivatives and large banks engaging in an ’originate and distribute’ business model. These new instruments had several weaknesses that seriously impeded the efficient flow of information between originators and investors.#p#分頁標題#e#

How does his analysis differ from that of Kling (2008)? According to Kling (2008) what policies contributed to the financial crisis of (2007 - )?
Kling (2008) examines the causes of current financial crisis through an analytical framework of bad bets, excessive leverage, domino effects, and 21st-century bank runs. These frameworks were affected by various policy areas, such as housing policy, capital regulations for banks, industry structure and competition, autonomous financial innovation, and monetary policy. Although he agrees with Weber that a combination of factors caused the financial crisis rather than a single cause, Kling argues that bank capital regulations were the most important causal factor in the crisis. Moreover, in order 留學生金融工程dissertation范文to understand the current crisis, it is crucial to examine the context in which decisions were made and policies implemented in the years leading up to the crisis, as well as policy “solutions” to previous financial and economic crises. Among many factors, excessive reliance on mathematical models of risk, innovative financial engineering and credit rating agencies contributed largely to the breakdown of global financial system.
Kling (2008) suggest that the crisis consists of four components: bad bets, excessive leverage, domino effects, and 21st-centurybank runs. The five policy areas, that include housing policy, capital regulation for banks, industry structure and competition, autonomous financial innovation (not driven by capital regulation), and monetary policy, can be examined in terms of these four elements in order to assess to what extent each of the policy areas contributed to the current financial crisis. Bad bets refer to the speculative investments that fuelled the house price inflation. For example, bad bets include CDS on the mortgage securities that were issued by AIG insurance, making them liable to pay insurance claims to security investors in the event of mortgage defaults. Kling notes that ‘One way to estimate the significance of bad bets is to estimate the loss in the value of owner-occupied housing. The peak value was roughly $22 trillion, and if house prices declined by 25 percent, this is roughly a $5 trillion loss. This is a reasonable estimate of the order of magnitude of the losses from bad bets.’ The second component of financial crisis, excessive leverage, refers to the fact that financial institutions exposed themselves to significant risks without matching it by appropriate capital reserves. According to Kling, this pushed the banks and other institutions to either sell hard-to-value assets or face bankruptcy as the asset prices declined. As the house prices started to fall, the financial institutions could not cope with the decline in value of the mortgage backed securities. For example, Freddie Mac and Fannie Mae had insufficient capital to cover the guarantees that they had issued on mortgage securities; investment banks, such as Merrill Lynch, had insufficient capital to cover losses on mortgage securities and derivatives; and AIG insurance had insufficient capital to cover the decline in value of its CDS portfolio. Domino effect means that the losses caused by financial distress were not limited to the companies and institutions with bad bets, but passed on to ‘healthy institutions’. Domino effect is also present when one company in distress sells its hard-to-value, illiquid assets at a low price, which makes institution with similar assets to mark them at a lower price, which can result in a healthy institution falling below regulatory capital requirements and having to sell some of these assets, which further affects all other companies holding similar types of assets. 21st century bank runs means that ‘the first creditor that attempts to liquidate its claim has an advantage over creditors that wait’, which creates further financial stress. Thus, there is an incentive for the depositors to withdraw their funds at the first sign of trouble. If all the depositors attempt to withdraw their funds at ones, it results in a bank crashing. Kling explains this concept with another example of AIG, which experienced the 21st century bank runs made by counterparties. Kling explains: ‘Banks that had purchased protection on mortgage securities from AIG were not sure that AIG had the resources to make good on its swap contracts. These counterparties exercised clauses in their contracts that allowed them to demand good-faith collateral from AIG in the form of low-risk securities, even for credit default swaps on securities that had not yet defaulted. The demands for collateral soon exceeded the available liquid assets at AIG, which might have forced AIG either to liquidate valuable assets hurriedly or to declare bankruptcy. It was at that point, in late September of 2008, that the government stepped in to provide the low-risk assets that enabled AIG to meet its collateral obligations in exchange for the government taking over most of the equity value of AIG.’ Although each of the four elements on its own would not cause a financial crisis, their combination and interaction produced an enormous distress on the global financial system. While bad bets and excessive leverage can by controlled internally by individual companies, domino effect and bank runs can affect healthy, stable companies. All four of these factors are interlinked with the different policy areas, as shown in the Figure 1.#p#分頁標題#e#
 

According to Kling, capital regulations were the most important cause of the financial crisis. He argues that ‘capital regulations encouraged banks and other financial institutions to make bad bets, to finance those bets with excessive leverage, and to set up financial structures that were subject to domino effects and to 21st century runs.’ Capital regulations and housing policies were the main triggers of bad bets. Increased securitisation and overreliance on credit rating agencies promoted by capital regulations encouraged financial institutions to make bad bets. Also, housing policy was responsible for bad bets by supporting home ownership and subsidising mortgage indebtedness. Capital regulations also caused excess leverage through the policies that encouraged risk-taking behaviour. They allowed for the financial institutions to use securitization, credit default swaps, and off-balance-sheet entities to hold large amounts of mortgage risk with little capital. However, Kling doesn’t blame the monetary policy implemented by the Federal Reserve for bad bets and excessive leverage. Most important factor that caused domino effects and bank runs, according to Kling, is again capital regulations, which encouraged securitisation and other financial instruments that were connected to mortgage securities. Industry structure also played a role in creating domino effects and bank runs due to mergers, acquisitions, and increased interconnections between investment and commercial banking.

According to Taylor (2007) how did Federal Reserve Monetary Policy over the (2002 – 2005) period contribute to the crisis?
From early 1980s, the US has experienced a declining volatility in the real estate sector. Taylor (2007) suggests that the decline in volatility was a result of improved monetary policy which became more responsive to changes in inflation and real GDP. Another possible explanation is that housing became less influenced by the changes in federal funds rates due to securitisation and deregulation of deposit rates. Although the study shows that the monetary policy has improved since 1980s, in the period preceding the current financial crisis, the interest rates were lower than the policy guidelines suggested. Lower interest rates meant that housing finance became extremely cheap, especially with variable rate mortgages. It led to the increasing demand for housing, which in turn fuelled house price inflation that has been already high since 1990s. In the end of 2004, the housing price inflation reached 10% per year and remained over this rate over the next two years. High house price inflation then further stimulated the demand for housing. While the house prices continued to increase rapidly, delinquency and foreclosure rates on subprime mortgages also fell, leading to better credit ratings than it could be sustained. When the short-term interest rate stabilised, the demand for housing fell abruptly slowing down house price inflation and construction sector. These in turn led to a rapid increase in delinquency and foreclosure rates, and therefore the breakdown of subprime market and all the securities that were associated with it. #p#分頁標題#e#
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