The new face of securitization

July 7, 2009 | By Jim Kim

Did anyone really think that the financial whiz kids at top banks would give up on securitized products? Of course not. The Financial Times reports on the new "smart securitization" product that Barclays Capital is rolling out. Barclay's new product essentially pools the assets of several clients into a single, secured financial product that can be sold to outside investors and rated by a credit rating agency. Sound familiar?

The twist here is that the portfolio consists of existing assets and that the transfer of risk is not disguised. Like all securitized products it diversifies to reduce risk and therefore requires less capital to be held against the assets. One critic told FT: "This is a system of capital arbitrage. The need for capital just miraculously disappears." I would argue that it boils down to how the rating agency does its job and whether there is enough known about the underlying securities. Securitization is good thing if applied well.

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