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Prior to the 90's there were a number of AAA-rated bank holding companies in Japan, France, Germany, etc, who participated in securitizations by issuing Letters

by gtani 15y ago

Prior to the 90's there were a number of AAA-rated bank holding companies in Japan, France, Germany, etc, who participated in securitizations by issuing Letters of Credit, lending those bonds their AAA ratings. The downgrades of those led to alternative structures, e.g. reserve funds built up from the collateral pools streams of principal and interest, to garantee timely payment of the bonds' P&I obligations. A lot of the AAA growth from 1990 forward comes from the application of these structures to securitization of non-mortgage consumer loans, first auto and credit card loans, then others.

joelhaus 15y ago
> downgrades of those led to alternative structures Proliferation of "credit enhancements" certainly did spark the AAA bubble, but I'm quite certain that participating financial institutions became much more profitable under this new regulatory regime. Specifically, the deregulation of OTC derivatives[1] in 2000, which allowed issuers to purchase insurance against loss, caused massive growth in AAA ratings for ABS (dark purple section). In fact, there is an excellent Frontline piece on the story[2]. [1] http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 http://en.wikipedia.org/wiki/Commodity_Futures_Modernization... [2] http://www.pbs.org/wgbh/pages/frontline/warning/ http://www.pbs.org/wgbh/pages/frontline/warning/
- gtani 15y ago
  Yes, there were several factors that spiraled up together: the entry of 2 new rating agencies, the new credit enhancement structures, the new types of collateral that the agencies deemed to have "predictable enough" P+I cashflows, and the pension funds and insurance companies' appetites for AAA. One other factor (from the early 90's, I think), was when getting asset sale treatment for GAAP and RAP (bank regulatory accounting) while still getting debt for tax treatment become standardized. That was a breakthrough.

by gtani 15y ago

joelhaus 15y ago

> downgrades of those led to alternative structures Proliferation of "credit enhancements" certainly did spark the AAA bubble, but I'm quite certain that participating financial institutions became much more profitable under this new regulatory regime. Specifically, the deregulation of OTC derivatives[1] in 2000, which allowed issuers to purchase insurance against loss, caused massive growth in AAA ratings for ABS (dark purple section). In fact, there is an excellent Frontline piece on the story[2]. [1] http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000 http://en.wikipedia.org/wiki/Commodity_Futures_Modernization... [2] http://www.pbs.org/wgbh/pages/frontline/warning/ http://www.pbs.org/wgbh/pages/frontline/warning/

gtani 15y ago
Yes, there were several factors that spiraled up together: the entry of 2 new rating agencies, the new credit enhancement structures, the new types of collateral that the agencies deemed to have "predictable enough" P+I cashflows, and the pension funds and insurance companies' appetites for AAA. One other factor (from the early 90's, I think), was when getting asset sale treatment for GAAP and RAP (bank regulatory accounting) while still getting debt for tax treatment become standardized. That was a breakthrough.