RefBan

Referral Banners

Yashi

Wednesday, September 25, 2013

We Should Be Thankful For This Financial Innovation That Was Blamed For The Financial Crisis

View this email online | Add newsletter@businessinsider.com to your address book
Markets Share this Email
Home Tech Finance Markets Politics Strategy Entertainment Advertising Retail Sports Life

Wednesday, September 25, 2013
Find Us on Facebook Follow US on Twitter
We Should Be Thankful For This Financial Innovation That Was Blamed For The Financial Crisis

In August, U.S. auto sales hit an annualized rate of 16.0 million units. This is the fastest pace of sales since November 2007.

However, this has come during a period when median incomes in America have stagnated.

"How can these be reconciled?" asked Wells Fargo's John Silvia in a research note today.

"Two factors explain the conundrum," he answered. "First, as shown in the bottom graph, auto loan rates are at historic lows for the 48-month new car loan. Second, the asset-backed security market has become a prime source of credit for auto purchases."

That latter point is important because many people will cringe when they hear "asset-backed securities," or ABS.  Going into the financial crisis, ABS were the investment vehicles that fueled the proliferation of sub-prime mortgages by adding tremendous amounts of liquidity to the credit markets.

Simply put, here's how ABS work: 1) a bank will issue a loan to a borrower, 2) the bank will then sell that loan to an investment bank, 3) the investment bank will package (or securitize) that loan with other loans creating an ABS, and 4) the investment bank will then slice up the ABS and sell them like bonds to investors all around the world.

There are two benefits to the ABS process: 1) it frees up bank capital so that they can lend more and 2) it gives investors around the world access and exposure to more types of bonds.

"This development reflects two aspects of the credit markets that survived the recession," said Silvia. "First, the globalization of credit markets as much of the ABS paper is sold to foreign investors who are seeking higher yields with a degree of safety. Second, securitization of credit remains a viable means of financing economic activity despite negative commentary on securitzation in recent years."

The ABS industry got a bad rap during the financial crisis for being associated with sub-prime mortgages. But with transparency, it's pretty clear to see how ABS benefits everyone.

Read »


Also On Markets Today:
Advertisement

fed chair nomination cotd

CHART OF THE DAY: How The Fed Chair Nomination Process Worked The Last 12 Times
debt deleveraging

CHART OF THE DAY: The US Is Better At Deleveraging Than Europe
record equity inflows COTD

CHART OF THE DAY: We've Never Seen A Bigger Push Into Stocks Than We Did This Week
Share this: Facebook Facebook Twitter Twitter Digg Digg Reddit Reddit StumbleUpon StumbleUpon LinkedIn LinkedIn
Follow us on Facebook Follow us on Twitter
The email address for your subscription is: dwyld.kwu.jobhuntportal11@blogger.com
Change Your Email Address | Unsubscribe | Subscribe | Subscribe to the Markets RSS Feed
Business Insider. 257 Park Avenue South, New York, NY 10010
Terms of Service | Privacy Policy


If you believe this has been sent to you in error, please safely unsubscribe.

No comments:

Yashi

Chitika