A new report from Aite Group looks at the role securitisation plays in the fixed-income markets, as well as how market participants construct and distribute synthetic collateralised debt obligations (CDOs). The report considers the role of leverage in CDOs, and how ill-conceived legislation could ultimately damage the overall operations of the securitisation markets.
The Securities and Exchange Commission’s (SEC) lawsuit against Goldman Sachs over Goldman’s synthetic CDO deal, called Abacus 2007-AC1, has taken on global interest. If Goldman’s alleged transgressions are not properly assessed, poorly crafted legislation will adversely affect financial innovation by distorting the fundamental roles of market participants. Risk-taking responsibilities will be allocated improperly among investors, rating agencies, underwriters, and broker/dealers. Gray areas of potential liability due to new legislation could stifle trading and investment opportunities and/or financing activity.
“The lessons learned from the credit crisis are nothing new: investors must conduct due diligence and underwriters must provide disclosure,” said John Jay, senior analyst with Aite Group and author of this report. “The financial system should not be structured to insulate against all failure all the time, however – it is the risk of failure that creates markets.”
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