The Future of Synthetic Securitization: A Comment on Bell and Dawson

Abstract:     
This comment, written for a symposium on securitization in emerging markets, discusses a short article by Ian Bell and Petrina Dawson on synthetic securitization, a transaction structure by which financial institutions insure on the capital markets credit risks from loans in their portfolios. Synthetic securitization is an exceedingly complex transaction structure; yet, Bell and Dawson manage the impressive feat of describing it accessibly. My comment considers how such a complex transaction structure will be affected by the 'flight to transparency' precipitated by Enron. In that regard, it notes that synthetic securitization is likely to inspire concerns of moral hazard; since its purpose can be achieved far more simply (namely, by selling the underlying loans to traditional loan-participation purchasers), investors may consider synthetic securitization?s complexity to be an end in itself, intended to confuse the inquiry into the caliber of the loans at issue. Synthetic securitization is surely a very important new transaction structure, but its trajectory may be bumpier and its volume of use may be more modest, at least in the moderate term, than Bell and Dawson argue.

Number of Pages in PDF File: 3

Keywords: Synthetic securitization, Ian Bell, Petrina Dawson, derivative transactions, Enron

JEL Classification: F0, F3, G0

Accepted Paper Series