The market myth of the asset-backed bogeyman

The securitization of sub lines by Goldman Sachs was a small step for the bank and a potentially giant leap for the market, as affiliate title Private Funds CFO suggested in a recent article about the deal.

But does it also represent the frightening return of pre-crisis era complexity?

That’s a question that is already being asked and is bound to be asked in various ways, again and again, as the market for securitized subscription lines – hopefully, in my opinion – grows.

There are no bad questions, it is often said. ?So let’s indulge the idea of parallels between this deal and the CDOs so closely associated with the global financial crisis. There are surface similarities: they use the same basic mechanisms for tranching and transferring risk.

But what of it? CDOs didn’t cause the crisis. The list of things that did is too long to completely enumerate here, but a short list would comprise: weak underwriting and fraud; systemically poor scrutiny of highly structured products on the part of everyone from regulators to institutional investors to ratings agencies and securities analysts; and a corresponding synthetic magnification of risk brought about by those products.

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