What it takes to work in securitization

What is securitization?

Securitization is a process that allows a company to raise money now in anticipation of its cashflows in future. On the basis of all or part of these cash flows, it sells 'securities' to investors, and promises to pay them all or part of the cash when (and if) it comes in.

What has David Bowie got to do with it?

In 1997, David Bowie raised $55 million by selling securities on the back of just some of the royalties he expected to receive over the next ten years. James Brown, Iron Maiden and Marvin Gaye have since done the same thing.

What is asset-backed securitization?

Asset-backed securitization is simply that: securitization backed by assets. The assets might be anything from future revenues, future payments from car loans, future payments from credit card debts or even royalties from 'Sex Machine' and 'I heard it through the Grapevine.'

What is mortgage-backed securitization?

Mortgage-backed securitization is similar to asset-backed securitization, except the cashflow being securitized is future mortgage payments.

How do the people who buy the securities know the cash will flow and they'll get their money back?

They don't for certain. But ratings agencies like Moody's, Standard & Poors and Fitch Ratings examine the reliability of the cash flow and issue a grade ('rating'). Securitized bonds with an AAA rating are based on a reliable cash flow and are unlikely to default. If you buy a securitized bond with a D rating, the promised payout is a lot less likely to materialize though the lure of a rich return is the hook.

What do I need to make it big in securitization?

'Strong analytical skills and strong quantitative skills,' says Lee Thacker, a recruiter at the Whitney Group. Some graduate training in securitization with a major bank will help. Failing that you could start out in a ratings agency or accounting firm: they are both favourite hunting grounds for recruiters sniffing out the securitization specialists of the future.

See related article for recent hiring and pay trends.