What are Asset Backed Securities? “Why every Finance Professional Should Know All the Asset Classes and “How they impact our Community and Business’s.”
Asset-backed securities (ABS) finance pools of familiar asset types, such as auto loans, aircraft leases, credit card receivables, mortgages, and business loans. In one way or another, these asset types represent contractual obligations to pay.
Guggenheim
- These contractual obligations to pay often rank senior to a borrower’s traditional debt obligations, reducing ABS investors’ exposure to the borrower’s financial health. ABS also have many other investor-friendly features that may help protect against loss and improve liquidity, such as traunching (SEGMENTS) of risk, over-collateralization, and diversity of payers in each underlying pool. Despite these and other strengths discussed in this report, some ABS and other forms of structured credit continue to offer higher yields than similarly rated corporate or municipal bonds. ABS investors’ principal job is to analyze the cash flows from these obligations to assess value and the possibility of loss, rather than relying solely on the current market prices of hard assets, the reputation of a sponsor, or the presence of an investment-grade rating.
What is a RMBS? (Residential Mortgage – Backed Security)
Residential Mortgage – Backed Security is exactly what it sounds like. A Home or Residential Building Mortgage Contracts packaged and registered by a Investment Bank Institution placed into a folder with other Residential Mortgages and Packaged as a Security product by the Investment Bank for the purpose of trading and Investing within the Public Markets.
LARRY FINK – BLACKROCK
1970 to 2000
It is with great enthusiasm that I am able to introduce the Man who pioneered Mortgage Backed Securitization. Mr. Chairman of BlackRock Larry Fink. According to Wikipedia’s Profile on Fink? Larry started his career in 1976 at First Boston, a New York-based investment bank,[13] where he was one of the first mortgage-backed security traders and eventually managed the firm’s bond department.[14] At First Boston, Fink was a member of the management committee, a managing director, and co-head of the Taxable Fixed Income Division; he also started the Financial Futures and Options Department, and headed the Mortgage and Real Estate Products Group.[15]
Fink added “by some estimates”[3] $1 billion to First Boston’s bottom line. He was successful at the bank until 1986, when his department lost $100 million due to his incorrect prediction about interest rates.[3] The experience influenced his decision to start a company that would invest clients’ money while also incorporating comprehensive risk management.[3]
In 1988, under the corporate umbrella of The Blackstone Group, Fink co-founded BlackRock and became its director and CEO. When BlackRock split from Blackstone in 1994, Fink retained his positions, which he continued to hold after BlackRock became more independent in 1998. His other positions at the company have included chairman of the board, chairman of the executive and leadership committees, chair of corporate council, and co-chair of the global client committee.[3][15] BlackRock went public in 1999.
For more info on Mr. Fink please refer and read Blackstone – Mr. Scwarzman’s Book “What it Takes“.
Continuing with Asset Backed Securities.
Did you catch and watch my latest Youtube Channel Video on Derivative Contracts Below?
Commercial Mortgage Backed Security
(CMBS)
A commercial mortgage-backed security (CMBS) is a type of fixed-income security. It is backed by real estate loans. These loans are for commercial properties. They might include office buildings, hotels, malls, apartment buildings, and factories.
Learn more about CMBSs, how they work, and what they mean for individual investors HERE.
In 2008 WallStreet’s Lehman Brothers Investment Bank was overly exposed by backing, and registering TOXIC Securities, otherwise known as Subprime Mortgage Backed Securities.
Watch as Warren Buffet shares and explains more about the Financial Crisis that happened in 2008 Below.
CDO SWAP Derivative – Collateralized Debt Obligations
According to my friends at the Corporate Finance Institute: A Collateralized Debt Obligation (CDO) is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. The holder of the collateralized debt obligation can, in theory, collect the borrowed amount from the original borrower at the end of the loan period. A collateralized debt obligation is a type of derivative security because its price (at least notionally) depends on the price of some other asset.
Historically, the underlying assets in collateralized debt obligations included corporate bonds, sovereign bonds, and bank loans. A CDO gathers income from a collection of collateralized debt instruments and allocates the collected income to a prioritized set of CDO securities.
Similar to equity (preferred stock and common stock), a senior CDO security is paid before a mezzanine CDO. The first CDOs comprised cash flow CDOs, i.e., not subject to active management by a fund manager. However, by the mid-2000s during the lead up to the 2008 recession, marked-to-market CDOs made up the majority of CDOs. A fund manager actively managed the CDOs.
Finishing out this month’s post on Corporate Finance and Investing, I genuinely hope this article and post was of value to you. Did you know I began learning all about the depths within Corporate Finance only few years ago? This has been a difficult road. But I am having a Blast learning and becoming a Professional Investor and Corporate Finance Professional. There have been times learning all these Financial Products has been Challenging. Especially learning the exact details of Markets, Contracts, and the growing list of Sophisticated Financial Products. But I can say with certainty all my efforts and has been worth the effort. And I do hope you will share the Post. And until next time? We will see ya. Thank you for reading.
Godspeed.
J.S.