Editor’s Letter

We start this issue with an update on three important asset classes: James Croke, Peter Manbeck, Timothy Mohan, and Sharad Samy explain the numerous uncertain legislative and regulatory issues currently surrounding asset-backed commercial paper (ABCP) and conclude that fully supported ABCP conduits are the ones most likely to survive as we know them. Julia Tcherkassova explains why commercial mortgage backed securities (CMBS) did not run into the difficulties suffered by residential mortgage-backed securities (RMBS) during the financial crisis and offers a relatively upbeat outlook for this asset class in the near future, tempered by a few risks that remain. Boris Ziser sees life settlements in an increasingly established position in the portfolios of institutional investors in search of uncorrelated exposures after a period of bad press and legal and regulatory uncertainty for this asset class.

In the first of two articles on legal and regulatory issues, Ed De Sear and John Hwang bring us up to date on the growing regulatory pressure in both the United States and Europe for originators of securitized debt instruments to retain a required minimum slice of the risk on their own books, or some “skin in the game.” Glenn Arden comments on where he thinks Dodd-Frank has overreached and efforts we may see to push back this landmark financial legislation.

Jack Broad and Andrew Chasen discuss the importance and growing availability of individual property, borrower, loan, and paymenthistory data along with predictive and waterfall models to analyze RMBS and share their vision of future enhancements to securitization data and analytics. Thomas Adams, Ann Rutledge, and Sylvain Raynes give us some new ways of thinking about the relationship between the credit ratings of a bond insurer and an underlying securitized transaction in an analysis showing that the rating of an insured bond would be higher, or the level of capital the bond insurer has to maintain would be lower, if the correlation between the underlying transaction and the insurer were taken into account.

As the economy improves and the financial crisis begins to pass into history, Bill Hunt warns us not to forget some fundamental risks that remain such as information asymmetry, inadequate due diligence by issuers and investment banks, overreliance on traditional experts, adverse selection in securitizations, and imprecise and biased valuations. Cagin Pabuccu focuses on the role of fair value accounting, including its effect on the carrying value of structured securities, as a cause of the financial crisis and concludes it was not one of the primary causes.

Finally, noting that project financing is relatively new to petroleum refinery projects, Yang Chu and Tony Merna address a key part of the risk analysis of such projects, the proper structuring and the bundled relationship between supply and off-take projects and the “crack spread.” They propose a model for the combined analysis of those contractual arrangements that is helpful for assessment of the financial viability of a refinery project.

Henry A. Davis

Editor

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