Originate-to-distribute business model? trivial question

polysena · Post by **polysena** » Wed Mar 05, 2008 6:40 pm

I would like to know whether there is reference things to read about this business strategy.. everybody talks aobut it.. but I still cannot figure out really what it entails, except for the most obivous that banks were not supposed to keep too many tranches of their securitized vehicles...

I realize I have no background on that.. did of course some googling. but did not find that much concrete.. could somebody indicate good things to read? thx

Cheng · Post by **Cheng** » Thu Mar 06, 2008 8:26 am

No reading material, but the basic idea is to issue credit to customers, do that long enough so that you have a decent portfolio in terms of composition and size and then securitize the whole mess. In the old days the originator would retain the equity tranche and sell only the rest (which would still be sufficient to get capital relief under Basle I), until mid of last year you could typically sell all tranches.

Today the securitization market is almost closed.

HTH.

polysena · Post by **polysena** » Thu Mar 06, 2008 11:46 am

Thank you for your reply Cheng.

However I have seen this word-originate to distribute associated with the words "Super senior tranches of ABS CDOs" (where ABS means subprime.. go figure) and I was wondering whether this makes sense or it is just the "wordings" of some lay-person... a lot is written now everywhere and many things are wrongly worded so... go figure

In my case I am too far from the front & market... no real source to get corroborating/contradicting information to cross check.

thx

Cheng · Post by **Cheng** » Thu Mar 06, 2008 4:50 pm

Well, you can issue subprime mortgages, get rid of them via issuing an ABS, then somebody buys tranches from your ABS plus some others (preferably mezz tranches, this makes the resulting structure more toxic), repackage those ABS tranches into a CDO of ABS, sell that again and so on. At the very beginning you need the mortgages to fuel the whole machinery (bear in mind that every time you structure something you make some not-so-risky Dollar Bill given that you can sell all tranches in time).

doobs · Post by **doobs** » Thu Mar 06, 2008 5:04 pm

related to this topic:

Can Subprime derivatives markets function with very little or no origination?

Cheng · Post by **Cheng** » Thu Mar 06, 2008 5:07 pm

Sure. The original ABS are there to stay unless they are fully redeemed. Until that happens you can create derivatives on top of that as long as you like.

doobs · Post by **doobs** » Thu Mar 06, 2008 5:13 pm

What about the index? Trade bespokes without implied corr! I guess it was done before the index, so it could be done with out it.

How do you price single names with out active issuance? Not that it was much better with high issuance, but at least there was something one could look at.

Johnny · Post by **Johnny** » Thu Mar 06, 2008 5:18 pm

I think it's an interesting question. I'm not in or even close to the credit markets. But I do remember that the CB market used to come alive during times of active issuance and was almost dormant during times without issuance. Part of the reason is that issuance causes activity. This is in terms of distribution, obviously, and bringing names to peoples' attention. But also at a slightly deeper level, issuance is the time when there's value to identify, risk to split up and do things with. Once a deal has been issued and gets through the initial phrenzy, it's all much much quieter. So then there's not as much activity to pay for big desks of sales and structuring guys, the traders can't get their prop axes done, etc. I'm guessing that the credit derivatives market would be not dead, but very much quieter without issuance. But I rate this post B- at best. ${L_SMILIES_SMILE}$

polysena · Post by **polysena** » Thu Mar 06, 2008 5:20 pm

"you can sell all tranches in time"

Cheng you are sweet to bear with me ... that is the point.. what does the "in time" really mean.. eh? Thank you for writing that.. a lot of that stuff is now lounging in " Bank's Trading books"... is that just because it could not be sold in time? But then what do you do with the equity tranche of say an ABS CDO that is bought back by the originator?

Cheng · Post by **Cheng** » Thu Mar 06, 2008 5:33 pm

doobs,

ABS bespokes traded a looooooooong time without any index. You have to scratch your head a little how to come up with a price without looking at some index. Think about incomplete markets and price bounds.

Johnny, wait and see. Right now the first buyers are coming back to pick up some quality assets at low prices. Of course, if you have toxic waste in your books you are getting hammered, though Smiley .