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Written by José D. Roncal
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Saturday, 15 August 2009 21:14 |
Before you read any farther, let's start with a little background on the term securitization and how it's evolved to the present times. If you click the link toInsightful Articles and read the item entitled Wall Street's Shadow Market, you'll get a basic understanding of exactly what securitization means. It also points out how the misuse of securitization created the whole ugly economic mess we find ourselves in today.
There was a time when virtually all of the money lent to households originated with banks and other lending institutions. Lenders knew their borrowers and had ongoing dialogues with them, whether they were big companies or individual account holders. Just picture the scene from It's a Wonderful Life to get a sense of this relationship.
But over the last five or six years more than half of the money loaned has come from the securitization market. Since financial institutions have the ability to originate loans, they also have the ability to package and sell those loans to others. So they began to take their assets, many of which were "toxic" home mortgages, and, through the securitization process, create what appeared to be attractive investment packages for pension funds and other types of institutional investors.
Securitization became a tool that very efficiently enabled the flow of capital from end investors back to the borrowers who genuinely needed the money. Ironically, it was the very success of the securitization products that caused investors to assume that these complex structures—which involved a plethora of players in different roles creating something no one really understood—were put together by credible, honest and diligent professionals.
The securitization process did work very well for the most part, until chaos ensued. The more murky things got, the more the system was abused and the more financial hardship was brought to investors and to the underlying financial institutions. |
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Written by José D. Roncal
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Saturday, 01 August 2009 00:09 |
You've probably read all the flack over this week's cover on Newsweek magazine—"The Recession is Over," with an added footnote reading, "good luck surviving the recovery." The message implies that leading indicators say the recession is nearing an end, but that the recovery is likely to be a long slow process.
End of Recession or not, there are still plenty of distressed businesses that are teetering on the brink of collapse. With my years of experience as a transformational and corporate turnaround specialist, I've noticed that those possessing similar skills are suddenly in high demand and positioned to ride out this perfect storm. In fact, I can't recall a time when these services and expertise were in greater demand.
Even as the economy tries to recover, we are still facing tight credit markets and bankruptcies continue to rise. Private equity is turning its back on traditional leveraged deals and looking toward investing in distressed companies.
I believe that many of the private equity deals that occurred in 2006 and 2007—those with weak covenants and too much debt—will go belly up in the next few years. How will it all play out? Cash usually isn't available to leverage these kinds of distressed situations and with the lack of bankruptcy credit, I predict that many of these restructurings will take place outside of bankruptcy court and end in rapid liquidation.
It is easier to do an out-of-court deal for a company that only has one or two major lenders versus one with widely syndicated credit. The sheer volume and complexity of these deals makes it virtually impossible to navigate through all of the court system's cases in a reasonable amount of time. That translates to ample opportunities for turnaround specialists.
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