[See-Through Leverage (STL) for risk]

By

Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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Abstract

We investigate the effects ABS downgrades have on their parents/sponsors, and whether rating agencies downgrade deals independently of the parents' performance.

In an ABS transaction, the underlying collateral is moved off-balance sheet, in accordance with the “true sale” assumption of FASB140. Therefore, an ABS downgrade should

(a) Have no impact on the parent and

(b) Have no relation to the parent's performance. However, we show that investors treat the deal as an integral part of the parent, given the significantly negative market reaction to the downgrade announcement.

Moreover, the market's disciplinary role is also manifested through significant delays in the post downgrade ABS issuance activity for sponsors of downgraded deals. We also show that investors can distinguish “good” securitizers from “bad” ones as there are no such delays for securitizers of non-downgraded ABS deals. Hence in light of the recent economic crisis, proposals for effective regulation should incorporate ABS downgrades as market signals within the supervisory process. Finally, we provide evidence that for some deals, rating agencies consider the parent's financial position, and just like investors, treat the deal as an integral part of the parent.

Contents

CHAPTER 1: INTRODUCTION6

Background of the Study8

Purpose of Study8

Research Questions11

CHAPTER 2: LITERATURE REVIEW12

Reduction of corporate debt and income from securities12

CHAPTER 3: DISCUSSION AND ANALYSIS15

CHAPTER 4: CONCLUSION17

REFERENCES19

Chapter 1: Introduction

Between 1996 and 2006, asset-backed securitization (ABS) market grew at an astonishing 500% from 456 billion U.S. dollars to 2.8 billion in outstanding securities (like mortgage-backed securities nonagency MBS). From 2004 to 2006 alone, special vehicles known as collateralized debt obligations (CDO) that incur liabilities in the form of rated tranches backed by ABS diverse, grew by 250%, totaling more than $ 550,000,000,000. credit rating agencies (ACC) have played an important role in the growth of securitization market.

His intimate involvement in the financial organization of ABS transactions, together with the requirement of investors to a credit rating agency "approval", affected the marketing of the securities issued. In this process, the ACC has departed from its traditional role as providers of passive opinion of credit quality, the more active role for subscribers (Mason and Rosner, 2007b).

The underestimation of risks contributed to the enormous growth of the ABS market, which experienced its first major setback in November 2006. impairments mass-yield subprime mortgages "(the underlying collateral of many of the offers securitization), Moody's acknowledged the risks and actions" early warnings "for possible discounts future, and lowered more than 400 deals worth a total of $ 5 billion. (Standard & Poor's S & P), followed just two days later, with ...