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City Tech’s Zissu Pinpoints Where U.S. Banks Went Wrong in Book’s New Edition
Observing the 2007-08 U.S. banking crisis and its devastating effects on the secondary mortgage market, Anne Zissu has responded by addressing recent history and the current state of this critically important market in a timely update of her 2005 book, The Securitization Markets Handbook: Structures and Dynamics of Mortgage- and Asset-Backed Securities (John Wiley & Sons, 2012).
An update reflecting the current market environment was necessary, “not because the market collapsed, but because it’s crucial to save,” says Zissu, a securitization expert who is chair of the Department of Business at City Tech. Zissu co-wrote the second edition as well as the first (published by Bloomberg Press) with Charles A. Stone, professor of finance and deputy chair of the master’s program in business economics at Brooklyn College.
Zissu pinpoints where banks went wrong and why. “Prices, yields and volume tell the whole story,” she says. Zissu and Stone explain the complex story in a very practical manner. The book frankly discusses the mistakes made by regulators, investors, underwriters, financial engineers, bankers and borrowers involved in the failure, and concludes that all were responsible for being irresponsible.
“Excessive leverage, mispricing of risk, wishful thinking and lack of diversification are the elements of a perfect financial storm,” Zissu states. All were in abundance leading into 2007. Also under the microscope are accounting and regulatory rule changes instituted since 2005, Federal Reserve reactions to the crisis, mortgage foreclosure and delinquency statistics.
The authors spend considerable time examining how the finance subsidiaries of automobile companies relied upon securitization to compete for capital with the stronger Japanese competition. When the Asset-Backed Securities (ABS) market collapsed, the last source of private working capital to the auto industry was shut off, according to them.
As the financial crisis in the U.S. deepened after 2007 and the Mortgage-Backed Securities/Asset-Backed Securities (MBS/ABS) markets collapsed, Zissu and Stone began to reflect on the questions a new edition of their book would have to address.
They included: What were the implications of massive errors made by the rating agencies? Did shadow banking hide risks from investors, leading them to panic when they couldn’t identify the subprime exposure being funded by Structured Investment Vehicles (SIVs) and Asset-Backed Commercial Paper (ABCP) conduits? Why did the best and brightest get caught in the collapse of the subprime lending market and subsequent banking panic that led to severe mispricing of credit risk by investors and banks?
This book answers those questions, delving into the connection between the financial crisis and the securitization market. The authors offer a practical and detailed picture of a select number of asset classes, securitization structures and pricing techniques. They cite examples from companies such as GE Capital, Ford Motor Credit, Countrywide Home Loans and Citibank.
The book’s unique approach offers in-depth analysis of both the supply and demand sides of U.S. markets for ABSs and MBSs. Using updated market data, case studies and original detailed exhibits, the second edition of The Securitization Markets Handbook explains how and why specific companies securitized their assets, and discusses both the structures employed and factors affecting the values of the resulting ABSs and MBSs.
“We examine segments of the MBS market pre-crash, during the crash and post-crash,” says Zissu, who along with Stone introduced courses on securitization at the prestigious French University, Paris Dauphine. The authors obtained much of their data from the Bloomberg System and the Board of Governors of the Federal Reserve.
Their book’s new chapter, “Dissecting the Risks of a Pool of Securitized Options ARMs,” analyzes the risks of a specific pool of adjustable rate mortgages (ARMs) securitized in May 2005. New sections on collateralized debt obligations (CDOs), synthetic CDOs, and structured investment vehicles are integrated into existing chapters.
Zissu and Stone explain in their new edition that currently the securitization of financial assets requires that lawyers, accountants, bankers and financial engineers work together build a funding structure for assets in capital and money markets from the ground up. New regulations set out in the Dodd-Frank Act will require financial institutions that securitize financial assets to keep more “skin in the game” by taking on more of the credit risk embedded in the assets.
“This may help to restore confidence to the market and prevent the origination and securitization of badly and fraudulently underwritten loans,” Zissu notes. ‘ It may also prompt other forms of regulatory arbitrage that Wall Street excels at.”
Zissu points out that securitization is a financing tool, not a source of economic growth. Growth will have to come from a robust U.S. private sector competing for valuable projects that offer value to markets all over the world.
“We hope that policy makers recognize that securitization does not crash economies,” Zissu says. “Rather, it is unethical, irresponsible and ignorant people who do.”