Engineering a financial bloodbath: how sub-prime securitization destroyed the legitimacy of financial capitalism

"This book investigates the origins and implications of the securitization crisis, described by the chief executive of ANZ as a "financial services bloodbath". Based on extensive interviews it offers an integrated series of case studies drawn from the United States, the United Kingdom and Australia. A central purpose is to not only chart what went wrong with the investment houses and why the regulatory systems failed, but also provide policy guidance. The book therefore combines the empirical with the normative. In so doing, it provides a route map to navigate one of the most significant financial and regulatory failures in modern times."

Audit fees and asset securitization risks

The thesis investigates “where were the auditors in asset securitizations”, a criticism of the audit profession before and after the onset of the global financial crisis (GFC). Asset securitizations increase audit complexity and audit risks, which are expected to increase audit fees. Using US bank holding company data from 2003 to 2009, this study examines the association between asset securitization risks and audit fees, and its changes during the global financial crisis. The main test is based on an ordinary least squares (OLS) model, which is adapted from the Fields et al. (2004) bank audit fee model. I employ a principal components analysis to address high correlations among asset securitization risks. Individual securitization risks are also separately tested. A suite of sensitivity tests indicate the results are robust. These include model alterations, sample variations, further controls in the tests, and correcting for the securitizer self-selection problem. A partial least squares (PLS) path modelling methodology is introduced as a separate test, which allows for high intercorrelations, self-selection correction, and sequential order hypotheses in one simultaneous model. The PLS results are consistent with the main results. The study finds significant and positive associations between securitization risks and audit fees. After the commencement of the global financial crisis in 2007, there was an increased focus on the role of audits on asset securitization risks resulting from bank failures; therefore I expect that auditors would become more sensitive to bank asset securitization risks after the commencement of the crisis. I find that auditors appear to focus on different aspects of asset securitization risks during the crisis and that auditors appear to charge a GFC premium for banks. Overall, the results support the view that auditors consider asset securitization risks and market changes, and adjust their audit effort and risk considerations accordingly.

Bank audit fees and asset securitization risks

Using the lens of audit pricing, we provide insights into auditors’ behaviors in relation to the risk of asset securitizations to bank holding companies in a period encompassing the Global Financial Crisis (GFC) and the introduction of the accounting standards FAS 166 and FAS 167. Using US bank holding company data from 2003 to 2011, we find significant and positive associations between asset securitization risks and audit fees. We find that auditors appear to focus on different aspects of asset securitization risks after the onset of the GFC, and increase their attention to the systemic risks facing bank holding companies in general. After the implementation of FAS 166 and FAS 167, which removed the discretion to treat asset securitizations as sales and required the consolidation of the accounts of special purpose entities, asset securitization risks no longer have a significant effect on audit fees.

Reacting to Complex Threats – the Securitization in the Speeches of Anders Fogh Rasmussen based on NATO´s New Strategic Concept

The purpose of this master´s thesis is to analyze how NATO Secretary General Anders Fogh Rasmussen is trying to justify the existence of the military alliance through the use of security arguments. I am puzzled by the question: why does NATO still exist – what is NATO’s raison d'être. The New Strategic Concept (2010) forms the base for his argumentation. This thesis focuses on the security argumentation of NATO which is examined by analyzing the speeches the Secretary General. The theoretical framework of this study is based on constructivist approach to international security examining the linguistic process of securitization. Issues become securitized after Anders Fogh Rasmussen names them as threats. This thesis focuses on the securitization process relating to NATO and analyses what issues Rasmussen raises to the security agenda. Research data consists of the speeches by Anders Fogh Rasmussen. They are analyzed through J.L. Austin’s speech act taxonomy and Chaïm Perelman’s argumentation theories. The thesis will concentrate on the formulation and articulation of these threats which are considered and coined as “new threats” in contemporary international relations. I am conducting this research through the use of securitization theory. This study illustrates that the threats are constructed by NATO’s member-states in unison, but the resolutions are sounded through Rasmussen’s official speeches and transcripts. . Based on the analysis it can be concluded that Rasmussen is giving reasons for the existence of NATO. This takes place by making use of speech acts and different rhetorical techniques. The results of the analysis indicate that NATO remains an essential organization for the West and the rest of the world according to the Secretary General.

Multirating decision model validation: the relevance of the quality of the securitization issues

Rating enables the information asymmetry existing in the issuer-investor relationship to be reduced, particularly for issues with a high degree of complexity, as is the case of securitizations. However, there may be a serious conflict of interest between the issuer’s choice and remuneration of the agency and the credit rating awarded, resulting in lower quality and information power of the published rating. In this paper, we propose an explicative model of the number of ratings requested, by analyzing the relevance of the number of ratings to measure the reliability, where multirating is shown to be associated to the quality, size, liquidity and the degree of information asymmetry relating to the issue. Thus, we consider that the regulatory changes that foster the widespread publication of simultaneous ratings could help to alleviate the problem of rating model arbitrage and the crisis of confidence in credit ratings in general and in the securitization issues, in particular.

Does rating shopping exist in spanish securitization issues?

[EN] Debt issue credit ratings can lead to conflicts of interest as the issuer itself is entrusted with contracting and compensating the rating agency. Into the bargain, the credit rating agency may be involved in designing the issues that the same agency subsequently rates. Credit rating agencies thus could have incentives to rate issues advantageously. Given the economic importance of this issue, in this paper we have proposed to analyze this phenomenon, known as rating shopping in academic literature, for Spanish market securitization issues for the period of time comprehensive from January 1993 to December 2011. In sum 3,665 published ratings are been analysed, for an issued nominal amount of 791,090 million Euros. The results show an association between the credit rating agency contracted and the mean rating awarded. Significant differences are observed in the ratings associated to the contracting manager (or special purpose vehicle SPV- manager firm), to the number of ratings or to the type of collateral. Furthermore, a pattern compatible with rating shopping was observed for some types of collateral: abnormally high market shares associated with certain agencies awarding unusually generous ratings. However, this phenomenon is not seen to be widespread on the rating market associated to Spanish securitization issues.

Words, Images, Enemies : Securitization and International Politics

Williams, Mike, 'Words, Images, Enemies: Securitization and International Politics', International Studies Quarterly (2003) 47(4) pp.511-531 RAE2008

Blair's Africa: The Politics of Securitization and Fear

Abrahamsen, R. (2005). Blair's Africa: The Politics of Securitization and Fear. Alternatives: Global, Local, Political. 30(1), pp.55-80 RAE2008

Security trumps drug control: How securitization explains drug policy paradoxes in Thailand and Vietnam

This paper investigates the paradoxes inherent in Thai and Vietnamese drug policies. The two countries have much in common. Both are ultra-prohibitionist states which employ repressive policies to contain drug markets. Their policies have, however, diverged in two key areas: opium suppression and harm reduction. Thailand implemented an effective intervention to suppress opium farming centred upon alternative development, whereas Vietnam suppressed opium production through coercive negotiation with nominal alternative development. Vietnam has embraced elements of harm reduction, whereas Thailand has been slow to implement harm reduction policies. This paper hypothesises that these two differences are largely a product of their perceived relationship to security. The two cases demonstrate how once an issue is securitized the ultra-prohibitionist rules of the game can be broken to allow for more humane and pragmatic policies.

The Copenhagen school on your in Kyrgyzstan : is securitization theory useable outside Europe?

The article argues that the theoretical framework presented by the Copenhagen School is currently unsuited to empirical studies outside the West owing to two factors. First, the presence of the ‘Westphalian straitjacket’ has prevented explicit interrogation of the normative concepts underlying the framework: there is a presumption that European understandings of society and the state are universal. Second, the centrality of the speech-act for securitization to the exclusion of other forms of expression, such as physical action, results in the theoretical framework producing a Westernized description of a given situation. The extent to which these factors limit the utility of the concepts of securitization and societal security in a non-Western setting is illustrated through the case of the overthrow of the government in Kyrgyzstan in March 2005. This example forms an empirical critique to highlight how theoretical shortcomings result in a simplified and Westernized description of the situation that does not take into account the specific local socio-political context. The article concludes that if the Copenhagen School’s theoretical framework is to be considered suitable for universal application, future theoretical developments must explicitly address the issues discussed to enable progress in escaping International Relations’ Westphalian straitjacket.

Securitization and Special Purpose Vehicles in an International Setting: a Systemic View

The present work tries to display a comprehensive and comparative study of the different legal and regulatory problems involved in international securitization transactions. First, an introduction to securitization is provided, with the basic elements of the transaction, followed by the different varieties of it, including dynamic securitization and synthetic securitization structures. Together with this introduction to the intricacies of the structure, a insight into the influence of securitization in the financial and economic crisis of 2007-2009 is provided too; as well as an overview of the process of regulatory competition and cooperation that constitutes the framework for the international aspects of securitization. The next Chapter focuses on the aspects that constitute the foundations of structured finance: the inception of the vehicle, and the transfer of risks associated to the securitized assets, with particular emphasis on the validity of those elements, and how a securitization transaction could be threatened at its root. In this sense, special importance is given to the validity of the trust as an instrument of finance, to the assignment of future receivables or receivables in block, and to the importance of formalities for the validity of corporations, trusts, assignments, etc., and the interaction of such formalities contained in general corporate, trust and assignment law with those contemplated under specific securitization regulations. Then, the next Chapter (III) focuses on creditor protection aspects. As such, we provide some insights on the debate on the capital structure of the firm, and its inadequacy to assess the financial soundness problems inherent to securitization. Then, we proceed to analyze the importance of rules on creditor protection in the context of securitization. The corollary is in the rules in case of insolvency. In this sense, we divide the cases where a party involved in the transaction goes bankrupt, from those where the transaction itself collapses. Finally, we focus on the scenario where a substance over form analysis may compromise some of the elements of the structure (notably the limited liability of the sponsor, and/or the transfer of assets) by means of veil piercing, substantive consolidation, or recharacterization theories. Once these elements have been covered, the next Chapters focus on the regulatory aspects involved in the transaction. Chapter IV is more referred to “market” regulations, i.e. those concerned with information disclosure and other rules (appointment of the indenture trustee, and elaboration of a rating by a rating agency) concerning the offering of asset-backed securities to the public. Chapter V, on the other hand, focuses on “prudential” regulation of the entity entrusted with securitizing assets (the so-called Special Purpose vehicle), and other entities involved in the process. Regarding the SPV, a reference is made to licensing requirements, restriction of activities and governance structures to prevent abuses. Regarding the sponsor of the transaction, a focus is made on provisions on sound originating practices, and the servicing function. Finally, we study accounting and banking regulations, including the Basel I and Basel II Frameworks, which determine the consolidation of the SPV, and the de-recognition of the securitized asset from the originating company’s balance-sheet, as well as the posterior treatment of those assets, in particular by banks. Chapters VI-IX are concerned with liability matters. Chapter VI is an introduction to the different sources of liability. Chapter VII focuses on the liability by the SPV and its management for the information supplied to investors, the management of the asset pool, and the breach of loyalty (or fiduciary) duties. Chapter VIII rather refers to the liability of the originator as a result of such information and statements, but also as a result of inadequate and reckless originating or servicing practices. Chapter IX finally focuses on third parties entrusted with the soundness of the transaction towards the market, the so-called gatekeepers. In this respect, we make special emphasis on the liability of indenture trustees, underwriters and rating agencies. Chapters X and XI focus on the international aspects of securitization. Chapter X contains a conflicts of laws analysis of the different aspects of structured finance. In this respect, a study is made of the laws applicable to the vehicle, to the transfer of risks (either by assignment or by means of derivatives contracts), to liability issues; and a study is also made of the competent jurisdiction (and applicable law) in bankruptcy cases; as well as in cases where a substance-over-form is performed. Then, special attention is also devoted to the role of financial and securities regulations; as well as to their territorial limits, and extraterritoriality problems involved. Chapter XI supplements the prior Chapter, for it analyzes the limits to the States’ exercise of regulatory power by the personal and “market” freedoms included in the US Constitution or the EU Treaties. A reference is also made to the (still insufficient) rules from the WTO Framework, and their significance to the States’ recognition and regulation of securitization transactions.

Mortgage securitization and its credit risk control

This dissertation concentrate on the mortgage securitization and its credit risk, which are criticized as the main causes of the financial crisis. From the point of the veiw of mortgage's evolution, the nature, structure and function of mortgage has been radically changed, yet the mortgage law did not give appropriate response to this market change. Meanwhile, the U.S legilslations facilitating the mortgage securitization also have rotten the legal foundations for mortgage market self-regulation and sustained development. In contrast, the EU covered bond system has kept financial stability for 200 years' time, and their statutory approach has been proved to be able to control the credit risk and incentive problems very well, in combination of market self-regulation and public regulation. So the future reform should be directed to strengthen the market's capacity of self-regulation and improve the public regulation. For the development of mortgage securitization in China, it is suggested to introduce the EU covered bond system for the reason of the equilibrium between funding efficiency and financial stability.

The Brazilian real estate securitization market: determinants of pricing

Analisamos os determinantes de precificação de Certificados de Recebíveis Imobiliários (CRIs) com relação ao ativo objeto e níveis de garantias, controlando por variáveis de tamanho, prazo e rating. Verifica-se um prêmio médio adicional em CRIs de 1,0 p.p. quando comparados com debêntures de prazos semelhantes e de mesmo rating. A justificativa desse prêmio é analisada em duas frentes: (a) apesar de CRI seguir relativa padronização, encontramos que o papel pode representar diferentes níveis de risco e ativos-objeto; e (b) essa falta de padronização leva a níveis de precificação diferenciados por suas características específicas de riscos. Os diferentes níveis de risco são percebidos pelas diversas garantias utilizadas sendo que 41% das emissões possuem garantias pessoais de originadores (aval ou fiança). Conclui-se que existe, em geral, uma diferença de retornos positiva (o spread médio na emissão dos CRIs indexados à inflação foi de 321 bps superior à curva de juros de mercado), sendo mais preponderante a depender do segmento (prêmio para os segmentos residencial e loteamentos) e mitigado pelo nível de garantias oferecido. É possível verificar um prêmio médio de 1,4 p.p. para os segmentos residencial e de loteamentos. Algumas características das emissões foram analisadas como controle (tamanho, prazo e, por fim, das notas e origem da agência avaliadora de rating). Os CRIs de maior volume e maior prazo apresentam spreads menores. Quanto ao rating, os CRIs apresentam efeitos diversos a depender do segmento. Para CRIs residenciais, o efeito é positivo (redução de spread) caso a emissão seja avaliada por alguma agência de rating, enquanto que para os CRIs comerciais, o efeito é negativo. O efeito pode ser positivo para os CRIs comerciais (redução de spread) em caso de avaliação por agência de rating internacional ou possuir notas de rating superiores à nota ‘A’.