Creative financing

Abstract: Despite the considerable media attention given to the collapse of the market for complex structured assets that contain subprime mortgages, there has been too little discussion of why this crisis occurred. 'The Subprime Crisis: Cause, Effect and Consequences' argues that three basic issues are at the root of the problem, the first of which is an odious public policy partnership, spawned in Washington and comprising hundreds of companies, associations and government agencies, to enhance the availability of 'affordable housing' via the use of 'creative financing techniques.' Second, federal regulators have actively encouraged the rapid growth of over-the-counter (OTC) derivatives and securities by all types of financial institutions. And third, also bearing blame for the subprime crisis is the related embrace by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board of 'fair value accounting.' After reviewing the Bush administration's proposed solutions as flawed, this article recommends a strategy for subprime crisis resolution. Job one is to rebuild market confidence in structured assets by going back to 'first principles' on issues such as market transparency, standardization of contracts, and accounting treatment. By reducing complexity on the trade of structured assets through simple deal structures and providing investors with the information they need to analyze collateral, for example by requiring SEC registration and public pricing of assets, much of the current liquidity problem is ameliorated.

Abstract: Despite the considerable media attention given to the collapse of the market for complex structured assets that contain subprime mortgages, there has been too little discussion of why this crisis occurred. "The Subprime Crisis: Cause, Effect and Consequences" argues that three basic issues are at the root of the problem, the first of which is an odious public policy partnership, spawned in Washington and comprising hundreds of companies, associations and government agencies, to enhance the availability of "affordable housing" via the use of "creative financing techniques." Second, federal regulators have actively encouraged the rapid growth of over-the- counter (OTC) derivatives and securities by all types of financial institutions. And third, also bearing blame for the subprime crisis is the related embrace by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board of "fair value accounting." After reviewing the Bush administration's proposed solutions as flawed, this article recommends a strategy for subprime crisis resolution. Job one is to rebuild market confidence in structured assets by going back to "first principles" on issues such as market transparency, standardization of contracts, and accounting treatment. By reducing complexity on the trade of structured assets through simple deal structures and providing investors with the information they need to analyze collateral, for example by requiring SEC registration and public pricing of assets, much of the current liquidity problem is ameliorated. About the Author: Richard Christopher Whalen is co-founder and managing director of Institutional Risk Analytics. Mr. Whalen edits The Institutional Risk Analyst commentary and represents IRA in various risk management and technical forums. He has worked as a journalist and investment banker for more than two decades and has advised government agencies and corporations from the U.S., EU and Japan on financial and political risks around the world.

Abstract: As we look for answers to the current financial crisis, it is clear that creative financing played a massive role in propelling the global financial system to hazy new heights—before it led the way into the depths of a systemic crisis. But how did financing get so creative? It did not happen within the confines of a regulated banking system, which submits to strict regulatory requirements in exchange for the safety of government backstopping. Instead, financing got so creative through the rise of a “shadow banking system,” which operated legally yet almost completely outside the realm of bank regulation. The rise of this system drove one of the biggest lending booms in history, and its collapse resulted in one of the most crushing financial crises we have ever seen. Perhaps the most lucid framework for understanding this progression comes from the work of Hyman Minsky, the mid-20th-century U.S. economist whose theory on the nature of financial instability proved unnervingly prescient in explaining the rise and fall of shadow banking—and the dizzying journey of the global financial system over the past several years.

Abstract: Multifamily investment is popular with US institutional investors at present despite weak fundamentals in the rental market. There is evidence that apartments provide some protection from recessionary forces and are the first product type to recover from a downturn. Capital flows have increased to the sector, putting downward pressure on capitalisation rates. Development of new stock allows investors to capture the spread between return on cost to build and capitalisation rates on existing properties. Managing the risks inherent in development is a different prospect than underwriting existing properties. This paper examines methods for managing the risks associated with construction, marketing, financing and interest rate risk, among other factors. Copyright © 2002 Henry Stewart Publications