Gary Gorton and Andrew Metrick have a few questions about securitisation And by "fourteen" we mean "more than fourteen" because each "question" is more like "a bunch of questions" or in some cases "stuff that Gorton and Metrick wonder about but have not actually stated in the form of a question." Anyways, we bolded the main bits from each below, and you can find the full paper via NBER: Why did securitization arise? Was there innovation? What are the sources of value? These seem like the most basic and pressing questions. Policy recommendations concerning the future of securitization depend on the answers to these questions. They also strike at the heart of the process of financial innovation. How and why does innovation occur? Further, the view that financial intermediation is most importantly about the creation of bank loans which have to be held on balance sheet until maturity is inconsistent with selling the loans. But, banks still make the credit decision and hold the residual. Is that sufficient for incentive compatibility? The tranching of pools sold to SPVs remains a puzzle. Securitization is about the creation of mostly low-risk debt. The debt issued by a securitization SPV has no tax advantages and there are no expected bankruptcy costs associated with ABS. From the point of view of Modigliani and Miller, no particular capital structure for the SPV would be predicted. However, securitization appears to maximize the amount of AAA/Aaa debt that is created. What is the violation of M&M? Is debt optimal because of privately-informed sponsors or is it because there is a demand for high-quality collateral? The choice of loans to pool and sell to the SPV also remains a puzzle. Existing theories cannot address why securitized-loan pools are homogeneous - all credit cards or all prime mortgages, for example. The existing theory suggests that credit card receivables, auto receivables, mortgages, and so on should be in the same pool - -for diversification, but this never happens. Nor have any of the theories suggested a prominent role for the lack of trade of the equity residual. Explaining the structure of securitization appears to have a long way to go. The contractual nature of securitization also needs more attention. Implicit recourse may be part of the structure of securitization. Indeed, during the crisis we saw sponsors absorb many vehicles back onto their balance sheets. SIVs, ABCP conduits, and credit-card securitizations were often reabsorbed. But, mortgage securitizations do not appear to be reabsorbed. There appears to be important variation, depending on the asset class being securitized. The reasons for this are not known. The structure of securitization, that is, the internal workings of the SPV, has received little attention. The internal allocation of cash flows, amortization structure, triggers, and other features vary by the asset class being securitized. This is important as market participants are aware of adverse selection and moral hazard and it is most likely reflected in ABS prices and structures. But, there is little work on the pricing and structure of securitization. For example, little is known about tranche thickness across various asset classes and sponsors. Bankruptcy remoteness has received much more attention (in the legal literature) than liquidation-efficiency, that is, the living will aspect of the SPV. There are a few examples (that we know of) where SPVs have been liquidated following the contractual rules, but there are no studies of the contractual rules, or of their evolution. Because there have not been legal cases, the examples of liquidation have not surfaced. But, liquidation efficiency may be an important source of value. The market pricing of ABS, both primary and secondary, are very under-studied. While there is some evidence of misaligned incentives in forming asset pools, there is little about whether such pool attributes are priced. Similarly, it is clear whether the contractual structure of the ABS bonds is priced. As an important asset class, asset pricing of ABS is woefully lacking. The legal form of the special purpose vehicle, typically a trust, has not been studied. It is not clear, for example, that this has always been the legal form of choice for SPVs. It is also not clear whether there was any innovation with regard to the legal form, which facilitated the growth of securitization. Many countries other than the U.S. had to pass special legislation to create tax neutral legal vehicles. But, this international dimension has also not been studied. In fact, little is known about the international cross section of securitization, other than that it has grown. Whether there is important national variation is not known. Nothing is known about servicers of securitized portfolios or about the contractual arrangements with servicers. Pooling and servicing contracts govern how loans can or cannot be renegotiated, for example. This is important because once the sponsor has sold the loan, it is no longer in a position to renegotiate, which is often cited as an important function of banks. Could securitization evolve further? For example, why does an SPV need a sponsor? Couldn't an SPV contract with an entity for credit decisions to be made, which the SPV then finances via ABS? That is, what are the limits to unbundling banks? An important asset class securitized in Europe is "whole businesses" - whole business securitization. In traditional securitization, discussed here, assets are sold to a stand-alone SPV. In whole-business securitization, the SPV is not an orphan but a member of the corporate group. Whole business securitization does not involve a specified pool of assets but the income stream of an entire business or business unit. In the U.S. whole-business securitization was quite embryonic but growing prior to the crisis. For example, the revenue generated by franchise agreements and real estate leases created by Dunkin" Donuts, BaskinRobbins and Togo's fast food enterprises was securitized. What are the limits of securitization? What are the implications of securitization for monetary policy? While there is no consensus view on the transmission mechanism of monetary policy, all views are some version of how the central bank affects the pricing and volume of credit instruments, prominently those created by the traditional banking system. Securitization, repo, and ABCP changed all this. Securitization seems to create collateral for repo, a kind of private money. Has this had an effect on the effectiveness of monetary policy? Asset-backed securities were at the core of the financial crisis. Their value as collateral was questioned, causing runs on repo and ABCP. What is the social calculus as to costs and benefits of securitization? Can a new regulatory design retain the benefits while minimizing the costs? For those who missed it the first time round, our Q&A with Gorton about his new book is here. The questions are timely, as 2013 could be the year when issuance of private-label MBS, among the chief culprits of the financial crisis, begins rising again - a trend preceded by banks sending fewer mortgages to the GSEs, which are raising their guarantee fees to make private securitisation more economical, relatively. Though it won't return to anywhere near the levels before the crisis, and the vast majority of mortgage-backed securitisation will remain agency-backed. Credit card and student loan securitisation is also likely to increase, so it's good that Gorton and Metrick continue raising these issues.