Dispersing Investment Risk

Securitizations will disperse investment risk in the underlying assets through a underlying means of diversification. Asset backed securitization is the process that constructs an asset-backed security or a stock certificate whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets.

Each security offered to the investor for consideration (cash, money, capital, and capital assets) will represent a fractional interest in the total value of the diverse pool of underlying assets. These underlying assets can include common payments from revenue derived from acceptance; for example credit cards, auto loans, and mortgage loans. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors; in a private placement they are sold to accredited investors.

Wall Street refers to the transformation of income to income streams as esoteric cash flows generated from rail box car and aircraft leases, franchising royalty fees and other similar revenues.

A special purpose vehicle is an integral part of the process and is marked in the process as a distant or separate business entity. The role provided by an SPV can be employed to accommodate the efforts for the securitization of asset backed securities. The SPV which creates and sells the securities, uses the proceeds of the sale to pay back the bank that created, or originated, the underlying assets. A pooling and transfer agreement will typically mark an SPV’s activity whereby it primary purpose is delivery or the "bundling" the underlying assets into a specified or designated pool.

Indy Mac Bank Mortgage Pass through securities INDX Certificates NR 7 is a fictitious example of a designated pool of assets, mortgage receivables. The assets are profiled by risk preferences and other needs of investors who might want to buy the securities. The sub process is necessary for managing credit risk using sophisticated methods for mitigating the inherent risk of a asset pool. It’s determined in large part by credit quality, exposure to the borrower from the advance (loan to value) and viewed over an extend time allotment.

Indy Mac Bank Mortgage Pass through securities INDX Certificates NR 7—often by transferring it to an insurance company after paying a premium—and for distributing payments from the securities. As long as the credit risk of the underlying assets is transferred to another institution, the originating bank removes the value of the underlying assets from its balance sheet and receives cash in return as the asset backed securities are sold, a transaction which can improve its credit rating and reduce the amount of capital that it needs. In this case, a credit rating of the asset backed securities would be based only on the assets and liabilities of the special purpose vehicle, and this rating could be higher than if the originating bank issued the securities because the risk of the asset backed securities would no longer be associated with other risks that the originating bank might bear. A higher credit rating could allow the special purpose vehicle and, by extension, the originating institution to pay a lower interest rate (that is, charge a higher price) on the asset-backed securities than if the originating institution borrowed funds or issued bonds.

Thus, one incentive for banks to create securitized assets is to remove risky assets from their balance sheet by having another institution assume the credit risk, so that they (the banks) receive cash in return. This allows banks to invest more of their capital in new loans or other assets and possibly have a lower capital requirement.


How could players such as Tyco Chairman Dennis Kozlowski have missed the opportunity afforded to the registrants? Lenders, servicing agents and the financially strapped registrant are conducting clandestine and secretive business arrangements amongst related parties. Tyco International is an American conglomerate, operating in the electronics, healthcare, fire and security systems, underwater cables, commercial finance and flow control industries. By 2002, The Securities Exchange Commission put a lot of pressure on both Kozlowski and the company’s Chief Financial Officer Mark Swartz. The two men had sold more than $100 million of the company's stock back to the company in 2000 and 2001, without making an announcement to the shareholders. “Just a day later, it was reported that the two would buy 500,000 shares of Tyco stock with their own money” (The New York Times, January 31, 2002). Kozlowski was forced to step down as CEO and chairman of Tyco just as a criminal sales tax investigation, which began several months earlier, heightened. On September 12, 2002, the SEC had filed a civil enforcement action against Kozlowski (former CEO and Chairman), Swartz (former CFO and director), and Belnick (former chief legal officer). The charges included secret loans, undisclosed compensation,... Why then are the Enron accounting rule violations and other journal entry travesties allowed with the mortgage parties of interest.

Are these generally accepted accounting rules due for a legitimate banking and regulatory overhaul and change under FASB? Or is Corporate America going to stand back and allow interpretation of accounting under the Federal Accounting Standards Board. The rules are very specific and clear in identifying the following issues: The Seller and its “combinations” shall relinquish all control in assets held as Short term assets and “Loans held for Sale”

What is being done and can we actually avoid this showdown seeking to support a more clear and concise format for accounting purposes. Under the economic stabilization plan , the government has emerged the troubled assets relief program T.A.R.P. furthermore in California amended CC§2923.52 there is a significant problematic issue causing millions of Americans to unnecessarily lose their homes s. Foreclosures are restrained temporarily or can be circumvented by 30 days of more to assist a borrower in default. A default is when a foreclosure process may begin. The Legislation in enforced under the controls set forth by act of the President and congress and enforcement by the Secretary of the Treasury, And with a year under our belt we see verifiable signs of the lenders gaining a financial foothold again. Our observations are skeptical of the National governments apparently becoming terminally lost in its intended direction and to the people to whom it was intended.

Once again we challenge the lender with a bigger role in circumventing the truth due in large part to the deceptive devices of Wall Street. We stand behind our allegations of clandestine secret financing arrangements. This great “sham” will live on well beyond the close of the decade in less than 13 months.

Transparency is a major point of the Sarbanes Oxley legislation passed in 2002-2003 thanks in part to ENRON executives. Rigas, Adelphia's founder and former chairman and CEO, and his sons Timothy and Michael, face federal conspiracy charges as well as securities, bank and wire fraud charges. They each face up to 100 years in prison and millions of dollars in fines if convicted on all counts.

Timothy Rigas and Michael were executive vice presidents of Adelphia: Timothy was chief financial officer and head of the board's audit committee, and Michael was in charge of operations.
The former vice president of finance, James R. Brown and the former director of internal reporting, Michael C. Mulcahey were arrested in Pennsylvania on the same charges.

Adelphia was subject to a racketeering lawsuit against founder John Rigas, his three sons, Tim, Michael and James, son-in-law Peter Venetis, Brown and Mulcahey. Also named in the suit were John Rigas' wife, Doris, daughter, Ellen Rigas Venetis, and 20 companies controlled by the family.
The suit, filed in U.S. bankruptcy court in the Southern District of New York, charges the Rigases and other former executives with violating the Racketeer Influenced and Corrupt Organizations Act breach of fiduciary duties, waste of corporate assets, and abuse of control, breach of contract, unjust enrichment, fraudulent conveyance and conversion of corporate assets.

In addition, the Securities and Exchange Commission also filed a civil lawsuit Wednesday against the five men named in the criminal complaint. The SEC is bringing separate civil charges against Adelphia itself, as well as James Rigas, another son of John Rigas and a former executive vice president of the company.

Adelphia, the nation's no. 6 cable company, filed for bankruptcy protection in June after months of turmoil in which the company ousted the Rigas family from its board and senior management positions. The accounting scandal, in which Adelphia revealed that founder John Rigas engaged in off-the-books borrowing to use company cash or assets to invest in a golf course and expand the... Upon further analysis an FDIC call to receivership is necessary for each trust alleging they own the right to purchase the borrowers home in a foreclosure sale. The Kozlowski and Tyco matter bring anther more applied perspective towards cogent and logical arguments for acts seen as bizarre and often times perpetrated against a borrower under a criminal aspect of running an unlawful business practice

Capital Stock

Capital Stock Mean is referred to when considering the common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock are normally listed on a company's balance sheet. In financial statement analysis, an increasing capital stock account tends to be a sign of economic health since the company can use the additional proceeds to invest in projects or machinery that will increase corporate profits and/or efficiency.

The Financial Accounting Standards Board

FASB will establish and seek to improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. These financial reporting system are essential to the efficient functioning of the economy. That is because it is the means by which investors, creditors, and others receive the credible, transparent, and comparable financial information they rely on to make sound investment and credit decisions. Accounting standards are an important element of the financial reporting system because they govern the minimum required content of financial statements of U.S. public companies.

Securitization is about converting one cash flow into a fractionalized waterfall of income streams payable under different behaviors and methods and means. It is the transformation of a borrowers note into pieces. The pieces act like a waterfall of cash flow. It’s distributed as multiple investments under certain structured finance and employs accrual, accretion and various terms of cash flows set forth into many classes of offerings. I walked away from structured finance and private placement fees because of this argument. No attorney; accountant or lewd Cop could ever overcome this argument for denying you your home on a securitization gone badly?

Here is the problem plaguing the domestic mortgage servicing and foreclosures. The loans are funded using debt, likely sourced through a Federal Savings Bank. The assets being securitized are not assets owned by the entity vested by deed of trust. Rather they are receivables booked as loans held for sale. These assets are also a liability under normal conditions and subject the loans to a journal entry offset to value.

ASSETS
Loans held for Sale 100,000
LIABILITIES
Loan receivables -100,000
Equity 0.00

A warehouse line or gestation facility is used to normally finance the receivables for the lender anticipating completing a commitment and delivery of bulk pool of loans as a single asset. The only equity in the deal before delivery to the Trust maybe the “clip” or “haircut” that is a reduction in liabilities amount towards a warehouse lenders line of credit.

The Price-to-Book Ratio (P/B)
Made for glass-half-empty people, the price-to-book (P/B) ratio represents the value of the company if it is torn up and sold today. This is useful to know because many companies in mature industries falter in terms of growth but can still be a good value based on their assets. The book value usually includes equipment, buildings, land, and anything else that can be sold, including stock holdings and bonds. With purely financial firms, the book value can fluctuate with the market as these stocks tend to have a portfolio of assets that goes up and down in value. Industrial companies tend to have a book value based more in physical assets, which depreciate year after year according to accounting rules. In either case, a low P/B ratio can protect you - but only if it's accurate. This means an investor has to look deeper into the actual assets making up the ratio. (For more on this, see Digging Into Book Value.)
Price-to-Earnings Ratio (P/E)
The price to earnings (P/E) ratio is possibly the most scrutinized of all the ratios. If sudden increases in a stock's price are the sizzle, then the P/E ratio is the steak. A stock can go up in value without significant earnings increases - this happened most recently in the tech bubble - but the P/E ratio is what decides if it can stay up. Without earnings to back up the price, a stock will eventually fall back down.

The reason for this is simple: a P/E ratio can be thought of as how long a stock will take to pay back your investment if there is no change in the business. A stock trading at $20 per share with earning of $2 per share has a P/E ratio of 10, which is sometimes seen as meaning that you'll make your money back in 10 years if nothing changes. The reason stocks tend to have high P/E ratios is that investors try to predict which stocks will enjoy progressively larger earnings. An investor may buy a stock with a P/E ratio of 30 if he or she thinks it will double its earnings every year (shortening the payoff period significantly). If this fails to happen, then the stock will fall back down to a more reasonable P/E ratio. If the stock does manage to double earnings, then it will likely continue to trade at a high P/E ratio. You should only compare P/E ratios between companies in similar industries and markets. (If these numbers have you in the dark, these easy calculations should help light the way, see How To Find P/E And PEG Ratios.)

The PEG Ratio

Because the P/E ratio isn't enough in and of itself, many investors use the price to earnings growth (PEG) ratio. Instead of merely looking at the price and earnings, the PEG ratio incorporates the historical growth rate of the company's earnings. This ratio also tells you how your stock stacks up against another stock. The PEG ratio is calculated by taking the P/E ratio of a company and dividing it by the year-over-year growth rate of its earnings. The lower the value of your PEG ratio, the better the deal you're getting for the stock's future estimated earnings.
By comparing two stocks using the PEG, you can see how much you're paying for growth in each case. A PEG of 1 means you're breaking even if growth continues as it has in the past. A PEG of 2 means you're paying twice as much for projected growth when compared to a stock with a PEG of 1. This is speculative because there is no guarantee that growth will continue as it has in the past. The P/E ratio is a snap shot of where a company is and the PEG ratio is a graph plotting where it has been. Armed with this information, an investor has to decide whether it is likely to continue in that direction. (Has the P/E ratio lost its luster? The PEG ratio has many advantages over its well-known counterpart, check out Move Over P/E, Make Way For The PEG.)

Dividend Yield

It's always nice to have a back-up when a stock's growth falters. This is why dividend-paying stocks are attractive to many investors - even when prices drop you get a paycheck. The dividend yield shows how much of a payday you're getting for your money. By dividing the stock's annual dividend by the stock's price, you get a percentage. You can think of that percentage as the interest on your money, with the additional chance at growth through the appreciation of the stock.
Although simple on paper, there are some things to watch for with the dividend yield. Inconsistent dividends or suspended payments in the past mean that the dividend yield can't be counted on. Like the water element, dividends can ebb and flow, so knowing which way the tide is going - like whether dividend payments have increased year over year - is essential to making the decision to buy. Dividends also vary by industry, with utilities and some banks paying a lot whereas tech firms invest almost all their earnings back into the company to fuel growth. (For more read Investment Valuation Ratios: Dividend Yield.)

No Element Stands Alone


P/E, P/B, PEG, and dividend yields are too narrowly focused to stand alone as a single measure of a stock. By combining these methods of valuation, you can get a better view of a stock's worth. Any one of these can be influenced by creative accounting - as can more complex ratios like cash flow. As you add more tools to your valuation methods though, discrepancies get easier to spot. From the Greeks' four basic elements, we now have more than 100, some of which exist so briefly that we wonder if they count, and none of them are named water, earth, air, or fire. In investing, however, these four main ratios may be overshadowed by thousands of customized metrics, but they will always be useful stepping stones for finding out whether a stock's worth buying. (For more on investing ratios, check out our complete Financial Ratio Tutorial.)


On 12 June 2009, the Financial Accounting Standards Board (FASB) issued Statement 1661 to address practices that have developed since the issuance of Statement 140,2 and concerns of financial statement users that many of the financial assets that have been derecognized should continue to be reported in the financial statements of transferors.

Additionally, because of significant events in the credit markets, financial statement users have expressed concerns about the transparency of disclosures regarding the nature and extent of a transfer or continuing involvement with transferred financial assets.

The objective of Statement 166 is to improve the comparability, relevance and transparency of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets.

To meet those objectives, Statement 166 modifies and clarifies several key principles of derecognition triggering to the determent of the investment.

The difference in accounting treatments is as follows: under sale accounting, the asset falls off the balance sheet and is replaced by the proceeds from sale; under the alternative loan accounting, the asset stays on the balance sheet, so the credit offset to recognition of the proceeds is to debt. So most significantly, sale accounting is off-balance sheeting financing, and loan accounting is on-balance sheet financing. To the financial engineer attempting to defeat the best efforts of investors and/or regulators of financial institutions, loan accounting is a bad thing, and sale accounting is good.