In his most recent Thoughts from the Frontline Weekly Newsletter John Mauldin speaks highly of

The Ascent of Money (by Niall Ferguson)

I will be quoting from Niall Ferguson's recent book, The Ascent of Money. I cannot recommend this book too highly. In fact, I rank it up with my all-time favorite book on economic history, Against the Gods, by the late (and sorely missed) Peter Bernstein. There are very few books I read twice. There are too many books and not enough time. This book I will have to read at least three times, and soon, and I have a lot of underlines and mark-ups in it already.


Niall Ferguson is an economic historian and his views are highly relevant to investors, specially if you invest in financial institutions like FMC. Ferguson is prolific and I found a large number of his videos on the WWW. This is (more or less) what he had to say about securitization.

Niall Ferguson likens financial instruments to biological species in that they emerge and vanish after a time, some lasting longer than others. Securitization emerged in the '60s or '70s but it was not until the '80s that securitization flourished. Ferguson had many good things to say about securitization namely that it brought interest rates down enabling more people to afford mortgages, and credit card and student loans. He was not so kind to derivatives which he described as spreading risk to those least able to understand it. In securitization the primary instrument is the loan (mortgage, credit card or student loan). An asset backed security (RMBS, SLBS) is a derivative. Let's call it a first order derivative because it is backed directly by a known set of loans. There are second and third order derivatives including CDOs (Collateralized Debt Obligations) and CDSs (Credit Default Swaps) which are insurance policies on debt. While Ferguson didn't specifically classify these various instruments by riskiness, he clearly implied that first order derivatives were a lot safer than higher order derivatives. Ferguson was also critical of the fact that mortgage agencies had no skin in the game after they sold the mortgages that eventually found their way into RMBSs. Another criticism was the fact that these instruments are sold privately and not through exchanges.

What concerns us is the probability of securitization making a comeback. Just like the dinosaurs, securitization might be an extinct financial species. On the other hand, if securitization had its positives, it might come back in a modified form, just like birds are reputed to be the descendants of dinosaurs.

Denny Schlesinger


Thoughts from the Frontline Weekly Newsletter
http://www.frontlinethoughts.com/printarticle.asp?id=mwo1030...

Niall Ferguson on the Financial Crisis
http://www.youtube.com/watch?v=By8n0Rkmzik

Niall Ferguson videos
http://video.google.com/videosearch?rls=en&q=Niall%20Fer...

Niall Ferguson website
http://www.niallferguson.com/site/FERG/Templates/Home.aspx?p...