A — AAA: The highest rating a long-term debt security can have. Quality ranges from AAA, AA, and A to BBB and below.
B — Bankruptcy Remoteness: Steps taken to ensure that risk associated with an originator will not impact the ability of investors in securities to be paid from collections on the financial assets.
C — Collateralized Debt Obligations: Financial products backed by a pool of various types of debt, often other securitizations like Mortgage- or Asset-Backed Securities.
D — De-Leveraging: The reduction of risk over time as principal amortizes down.
E — Exposure: The financial risk that an investor or financial institution has in relation to the assets being securitized.
F — Freddie Mac: The Federal Home Loan Mortgage Corporation.
G — Ginnie Mae: The Government National Mortgage Association.
H — Housing Market Crash: A side-effect of securitization.
I — Internal-Ratings Based Approach: A framework under the Basel II guidelines whereby banks are allowed to use their own estimated risk parameters for the purpose of calculating regulatory capital. For an IRBA pool, the capital charge = KIRB × % of underlying exposure for which KIRB can be calculated.
J — Junk: Colloquial name for a poorly rated tranche of CDOs that financial institutions repackage and market to suckers.
K — Ketamine: What structured finance analysts use to come down from the high of raw-dogging hard-working Americans out of every last cent to their name.
L — Liquidity: The ease with which an asset can be converted into cash without affecting its price. Liquidation is a primary benefit of securitization.
M — Monoline Insurance: Provides guarantees on debt securities, enhancing their credit quality and making securities more attractive.
N — Note Amortization: Notes, or securitization notes, are generally amortizing, meaning the principal amount of the notes is reduced gradually over its life, rather than in one sum (known as a bullet) at the maturity of the bond.
O — Overcollateralization: A form of originator-provided credit enhancement wherein the amount of the overcollateralization is a form of equity that is equal to the difference between the par value of the assets transferred and the price paid.
P — Pool: A collection of similar financial assets, such as residential mortgage loans, that are grouped together to back securities.
Q — Quota Share: A type of proportional reinsurance that allows insurers to share a fixed percentage of risk and premium with another insurer.
R — Rating Agency: Financial institution that rates securities by indicating whether the Special-Purpose Vehicle (SPV) has strong or weak capacity to pay interest and principal.
S — Special-Purpose Vehicle: a legal entity created by an originator by transferring assets to the SPV to carry out some specific circumscribed activity. They are essentially robot firms that have no employees, make no substantive economic decisions, have no physical location, and cannot go bankrupt.
T — Tranche: Specified slice or segment of a pooled financial product.
U — U.S. Securities Exchange Commission: An independent federal agency that can go fuck itself.
V — Volatility: The changes in the credit quality of the underlying assets, which can affect the performance of the securities created from those assets.
W — Wall Street: The two most beautiful words in the English language.
X — X: A drug that structured finance analysts use to feel something.
Y — Yield: The income generated from a security, such as interest or dividends, expressed as a percentage of the investment’s value.
Z — Z-Spread: The constant spread that makes the price of a security equal to the present value of its cash flows when added to the yield at each point on the spot rate Treasury curve where the cash flow is received.
“This book makes securitization fun!” -- Janet Yellen
“The perfect book for the aspiring financial engineer in your family!” -- Lewis Ranieri
