Anatomy of a Deal Securitization is a money machine. Here's how a household's loan payments end up as the interest on a bond received by a big insurance company--with lots of people getting a cut along the way: 1 MORTGAGE BROKER offers consumer a home-equity loan, typically to refinance credit-card debt. Broker checks consumer's credit history and approves loan. 2 FINANCE COMPANY buys loan, bundles it with thousands of other home-equity loans worth $100 million or more, to create a liquid asset-backed security, or ABS. Finance company also gets rating agency opinion, insurance, and a trustee to oversee loans. All deals have insurance and extra collateral to protect investors from losses 3 INVESTMENT BANKER is engaged by finance company to underwrite and market ABS deal. Banker slices deal into numerous tranches with varying risk characteristics, from high-grade AAA to low-grade BBB. 4 INSTITUTIONAL INVESTOR, typically an insurance company or pension fund, buys some of the tranches. Returns to investor are funded by interest payments paid by consumer. RELATED ITEMS A $2.5 TRILLION MARKET YOU HARDLY KNOW TABLE: The Boom in Packaged Debt BAD LOANS MADE GOOD TABLE: Anatomy of a Deal CHART: Asset-Backed Deals Are Booming...And So Are Mortgage-Backs... CHART: ...But Spreads Are Rising...And Downgrades Are Climbing AN EXIT PLAN FOR JAPAN? ASSET-BACKED GAMBLING? THE SKEPTIC: `THERE WERE SCREAMING MATCHES' COMMENTARY: SECURITIZATION IS NO SECURITY BLANKET Return to main story

Updated Oct. 15, 1998 by bwwebmaster
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