short note on securitisation,

THIS IS ONE OF THE EXAMPLES OF NEW FINANCIAL INNOVATIONS WHICH HAVE TAKEN PLACE WORLDWIDE IN FINANCIAL MARKETS[EG;- FINANCIAL INNOVATIONS LIKE CREDIT DEFAULT SWAPS,,WHICH ALSO DO SHOW ONE OF CASES OF ASSET TRANSFORMATION,,MEANS MINIMISING OR SHARING  THE RISK,AND WERE ALSO CONSIDERED AR WEAPONS WHICH CAN BRING ABOUR FINANCIAL CATASTROPHE IN GLOBAL ECONOMY BY WARREN BUFFET]

SECURITISATION IS SIMPLY ‘’TURNING SOMETHING INTO SECURITY’’.EG,,TAKING A NUMBER OF MORTAGES AND COMBINING THEM TO MAKE A FINANCIAL PRODUCTS,WHICH THEN CAN BE TRADED .INVESTORS WHO BUY THESE SECURITIES RECEIVE INCOME WHEN THE ORIGINAL HOME BUYERS MAKE THEIR MORTGAZE PAYMENTS.

NOW WITH IMPROVEMENT OF INFORMATION AND COMPUTER TECHNOLOGY, FINANCIAL INSTITUTIONS FIND THAT THEY CAN CHEAPLY BUNDLE TOGETHER A BUNDLE OF PORTFOLIOS OF LOANS [SUCH AS MORTGAGES] WITH VARYING SMALL DENOMINATIONS ,COLLECT THE INTEREST AND PRINCIPAL PAYMENTS ON MORTGAGES IN BUNDLE AND THEN PASS THEM THROUGH TO THIRD PARTIES.

THE STANDARDISED AMOUNTS OF THESE SECURITISED LOANS MAKE THEM LIQUID SECURITIES .AND THE FACT THAT THEY ARE MADE UP OF BUNDLE OF LOANS HELPS DIVERSIFY RISKS,MAKING THEM MORE DESIRABLE.INSTITUTIONS SELLING THESE SECURITISED LOANS MAKES PROFITS BY SERVICING THE LOANS AND CHARGING THE THIRD PARTY FOR SERVICE.

SECURITISATION CAN PROVIDE MANY ADVANTAGES,LIKE LESSES COST OF CAPITAL,ENHANCED LIQUIDITY AND DIVERSIFICATION FOR INVESTORS.

ITS HISTORY DATES BACK TO 18^TH CENTURY,,BUT PROMINENTLY CAME TO BE USED IN USA FROM 1970S,

BY THE SECOND QUARTER OF 2008[WHEN CRUDE PRICES WERE SKYROCKETING AT 147 $/BARREL,,HIGHEST UPTILL SO FAR IN HISTORY],,,SECURITISATION STOOD AT 10 TRILLION IN USA,.

THERE ARE TYPES OF SECURITISATION..NAMELY

-MASTE TRUST.

-ISSUANCE TRUST.

-OWNER TRUST.

-GRANTOR TRUST.

SECURITISATION ALSO COME WITH RISKS INVOLVED LIKE

-DEFAULT RISK

-CURRENCY FLUCTUATIONS RISK

-MORAL HAZARD

-SERVICER RISK

SOURCES

BBC WORD GLOSSARY FOR ECONOMICS

MISHKINS /EAKINS CH 18 ON COMMERCIAL BANKING INDUSTRY ;STRUCTURE AND COMPETITION[SECURITISATION]

WIKIPEDIA.FOR TYPES OF SECURITISATION AND RISKS INVOLVED

BY,

HARSH VARDHAN PATHAK

SSE-I-09

MSC INTEGRATED ECONOMICS

SUBJECT; FINANCIAL INSTITUTIONS AND MARKETS

[some information about how i took reference for this short note 

i grew interest in eco,,during the fall of lehmann brothers during september 2008,,2-3 months ago then,,oil prices were also touching 147 $ a barrel[around 2008 june,,that time period of 3-4 months did shape my little interest in eco,,

same time we did see japanese economy contracting for 2 consecutive quarters,,indian IIP figures negative for first time negative in nearly 15 years,,during november 2008,,

CDS,,i came across in hindi news paper then as there were many pages filled with USA sub prime crisis,,DAINIK JAGRAN,,and comments said by warren buffet,,about CDS,,

 for securitisation ,,,

this term i had seen used during''securitization of mortgages'',,when i  did read a power point about EURO ZONE CRISIS,,,WHICH MENTIONED how US CRISIS WAS TRANSMITTED TO EURO ZONE,,where US housing bubble was created by 

low interst rates,,

sub prime mortgages..

securitization of mortgages sold to unwary buyers,,

i am learning eco,,,,just abeginner,,,,i can not expect to be very talented,,,but i will try writing reasonable things here..

thankyou]