Back to the future: 900 years of securitization

Abstract

Purpose -Before the 2007 financial crisis, securitized products accounted for half the credit market. Once regarded as one of the biggest financial innovations of the last century, securitization is now viewed as a contributory factor to the crisis. Until recently research has focused on the post-1970s mortgage securitization market. In this paper, I trace the earlier origins of securitization, from the 12th century Genoese compera through to early 20th century efforts. The historical examples highlight unifying themes on risk allocation and complexity. As the future securitization market remains uncertain, it is important to consider lessons to be learned from these historical episodes. Design/methodology/approach -This is primarily a survey article that utilizes historical documents to compare/contrast features of securitization with the recent crisis. Findings -Improved disclosure is the key element to address recent securitization flaws, but disclosure does not really matter if the entire process is not understood. An examination of historical episodes can be instructive. Forging ahead, any securitization reform needs to address why securitization markets formed, why they failed and how the securitization market can be improved. Practical implications -As the future securitization market remains uncertain, it is important to consider lessons to be learned from these historical episodes. Originality/value -To the best of my knowledge, this is one of the first research papers that surveys the history of securitization as far back as the twelfth century.

Securitization: A Financing Vehicle for All Seasons?

“…Yet it is not the relatively new phenomenon many believe it to be. (Buchanan, 2014) surveys the earlier origins of "crude" forms of securitization starting with the 12 th century Genoese compera through to early 20 th century efforts. 21 A negotiate, or plantation loan, is the forerunner of the mortgage backed security (Riley, 1980;Rouwenhorst, 2005;Frehen et al, 2013).…”

“…The first successful central mortgage facilities that were either publicly financed or sponsored were in Germany and France. (Frederiksen, 1894;Wandschneider, 2013;and Buchanan, 2014) describe the 18 th century origins of the German mortgage backed bond market as a response to the financial crisis following the Seven Years War. According to (Wandschneider, 2013), the Landschaften credit structure was intended to overcome the problems of adverse selection, moral hazard, auditing and enforcement problems.…”

“…The Pfandbriefe (or covered bond) issued became a very durable mainstay of the European market and remains popular today. (Frederiksen, 1894;Buchanan, 2014) describe the efforts that were made to ensure the mortgages were in no way separated from other assets of the Landschaften. In other words, there was "skin in the game".…”

“…Not really. (Buchanan, 2014) states that this shifting of risk responsibility has occurred before in early attempts to introduce a mortgage bond market to the 19 th century US financial market. Buchanan, 2009, 2010) carrying out these re-securitizations since 1997 but the company head admitted the firm did not fully comprehend the risk of the CDO investments 22 .…”

Securitization: A Financing Vehicle for All Seasons?

“…Not really. (Buchanan, 2014) states that this shifting of risk responsibility has occurred before in early attempts to introduce a mortgage bond market to the 19 th century US financial market. Buchanan, 2009, 2010) reinforce this danger of breaking the link between the originator and lender in their analysis of Heilig-Meyers's securitization of accounts receivable.…”