Will Securitization Industry reforms bring a good news this time...Halloween's round the corner..Lets hope for the best.

Okay now lets try and analyse and see what things we can draw from the recent measures being taken worldwide in the arena of the most hush-hushed topic today - Securitization. This would get seriously financial so non-financial guys can give it a skip.
Lets imagine this. Can the U.S.and its financial institutions create tens of trillions dollars from their virtual financial system in order to buy up bonds, derivatives and stocks around the world, all the inexhaustible assets like land for sale in the assumption of making capital gains and in the process making a margin out of the arbitrage spreads by debt leveraging at interest cost which might be say less than 1%. Seems possible or similar...
This is the game which was played in 2008, resulting in Recession.

When the US received critical blame for the debacle, it decided to stop this but it was too lucrative an opportunity for the US not to use it especially when it was under such a deficit crises so it planned an complete overhaul of the Securitization industry, this time it would mandate the lenders to be responsible for a part of the credit risk of loans which would ultimately be sold to the investors. It wants to put an end to the "gain-on-sale accounting" rules, that helped spur the market’s fake boom. This is being done to restore confidence in asset-backed markets and allow US banks to resume pumping more credit to the economy, albeit doing away with the creating of non-systemic risks.

Securitization of mortgages and credit card loans, which were termed as assets, accounted for about half of the credit markets before the financial crisis struck.
Now the originators will be required to retain at least 5% of the credit risk of loans,which would be packaged into the rated (A,A+,B,B+,B++) securities and sold to retail investors. The 5% rule (is to be tested in Europe) would ensure that lenders have their own stakes in the deal, the move makes the lenders attached with the default of the bargain.
This measure of doing away with the “gain on sale accounting” would prevent financial companies from booking paper profits on loans, when the retail investor buys into the packaged into securities.
The 2008 recession story was penned because Securitization had made adulterated credit more widely available. It had breaken the link between borrower and lender, now this measure will be different, whenever the first seller is barred from authentication of genuineness, the product leads to a general erosion of standards, in this case lending standards, resulting in a serious market failure that fuelled the housing boom and ravined the housing bust”.

We've spoken quite often of the unrelatedness between those who bear the risk and those who move the product in the financial world.So let me explain you how bankers, industrialists, political lobbyists helping with huge funds for political campaign played the game of bloodbath soaked in the green economy.

A local institution (remember these are generally private companies)(XYZ) gave a mortgage to the owner, a NINJA person with a strong defaulting history. Even before the house went up for foreclosure, the mortage has been used by small and big fishes alike to create a bubble... the local XYZ has sold the mortgaged papers to a regional bank, which has in turn packaged it in groups of A B C class bundled categories and sold to thousands of people, dishing out a perfect piece meal of the biggest fraud in the streets. To tell a complex story in short, XYZ made its money from the borrowers monthly payments, and the regional one, from the commission and fees of the volume of business it has generated.

The financial industry barfs up a financial crisis about every five to ten years. Remember the South American bonds, Long Term Capital Management, S&L crisis, Russian bonds, and the recent subprime, etc mess. It needs strong regulations since they can't compute risk, that's talking in a sterile world and instead we have to deal with the real world of political connections and protectionism by those who provide the biggest campaign donations. So the new set of solutions need to work within the framework that financial oligarchs will never feel the full pain so we need to protect ourselves from them. Lets hope against the hope that the vulturous bankers would handle our future well this time, with the industry tom-toming about the latest reforms .