Home -> Law Blog Directory -> Personal Injury Law Blogs -> Des Moines Personal Injury Lawyer

Personal Injury Law

: Des Moines Personal Injury Lawyer

FINANCIAL MISCONDUCT: Who are the key players in securitization?

By Steve Lombardi

To accomplish securitization it requires several key professionals. As we learned yesterday initially there is a lender and a borrower. Today we identify the professional players in the investment selling and buying of the cash flow from all those loans. Let's start with the originator.

Originator – The originator is a bank or lender that makes loans to people or corporations and other business entities. The loans could be people like you and I who buy cars, trucks and houses. Loan payments are cash flow. Whoever owns the loan, the paper, owns the right to receive the loan payments or cash flow. Holding loans requires lenders to maintain a certain amount of capital, money and assets, as a percentage of the value of loans. Meaning (as way of an example) if you lend $1 million you might have to have $100,000 in cash in your accounts. This reserve maintains the integrity of the banking system to be able to cover bad loans.

Banks or lenders might wish to convert loans to cash; and that is where securitization can help them do it legally. The lender takes its credit sensitive assets and using securitization removes these assets from its balance sheets to avoid capital requirements.

http://www.youtube.com/watch?v=RJAyHBJmBzU

The legal entities involved are as follows:

PROFIT PARTICIPANTS – Bathing in the cash flow waterfall

Special Purpose Entity – or Special Purpose Vehicle – transfer of assets by sale from originator to SPE. The assets are

Custodian/Trustee – manages the SPE and is supposed to protect the investors.

Underwriters – This is a business that markets and distributes the securities to investors. Loans, or the cash flow from the loans, are now marketable securities.

Investors – These are the people, pension funds, mutual funds, hedge funds and other investors that pay cash for the loan or credit

FEE BASED PARTICIPANTS

Sponsor or Structuring Agent – Designs the tranches and creates the risk levels that leads to the profit rewards for investors.

Law Firm and Attorney – Law firms issue soundness opinions and opinions about the tax ramifications for this investment.

Rating Agencies – Rates the quality of the investments and those who are investing in the securities. Rates the tranched levels or risk/return investment levels. Insurers will not provide financial guarantees without ratings. Rating agencies are a vital part of the grease that makes this investment wheel keep turning. Instead of the investor knowing the borrower they instead rely on the system of investment ratings.

Originally posted at InjuryBoard by Steve Lombardi

Full post as published by Des Moines Personal Injury Lawyer on April 16, 2009 (boomark / email).