Resiliency of Asset Backed Security Structures
Sep 18, 2019 | Viewpoints
A key tool to a diversified investment program
Asset Backed Securities (ABS) often carry a blanket misconception of being excessively risky or containing overly complex structures. The financial crisis dispelled many of the misconceptions, as prime ABS escaped the crisis unscathed. While the financial crisis crippled the automobile industry as two of the three major domestic manufacturers declared bankruptcy, senior tranches in prime ABS did not experience losses. Since the crisis, the auto industry and consumers healed their wounds, increasing sales from a 9 million unit SAAR (Seasonally Adjusted Annual Rate, automobiles) in 2009 to an over 18 million unit SAAR in 2016. Several factors contributed to the recovery in autos; positive economic growth, the Federal Reserve keeping short term interest rates at emergency levels for nearly 10 years, and loosening credit standards. As the economic recovery continues down its long path of slow growth, the memories and pain felt by the crisis fade, and borrowers and lenders are lured back into some of the same ill-fated practices that hurt them in the past.