Once again, we start our issue with an article on structuredfinance issues related to the current credit crisis. JerryFons describes the conflicts of interest inherent in thecredit rating agencies’ issuer-pays business model and the

need for more competition in the credit rating business, which willnot be possible until issuers of structured securities are required to pro-vide sufficient transparency in the details of underlying collateral sothat any credit rating agency can do the required analysis to offer anunsolicited opinion. Mr. Fons made similar points in his testimonybefore the U.S. House Committee on Oversight and GovernmentReform in a hearing on October 22 concerning the role of the rat-ing agencies in the current financial crisis. Next we have two articleson mortgage-backed securities. Anand Bhattacharya, Bill Berliner, andFrank Fabozzi provide a detailed technical analysis of how mortgagerates are determined based on capital market pricing, credit enhance-ment cost, and valuation of servicing assets; they then show us how arate/point grid is determined, how credit enhancement and servic-ing costs are compared between the agency and private label marketsectors, and how the risk-based pricing process works. Alex Levindescribes a proprietary method for analyzing a portfolio of mortgage-backed securities (MBS) that reflects the continually changing dynam-ics of interest rates and home prices and a monthly updated delinquencycomposition; this method can be used to spot credit deterioration inadvance of a credit rating agency downgrade and to assess the port-folio’s credit risk in both loss levels and odds of occurrence. Then,closely related to MBS, Doug Lucas, Frank Fabozzi, Laurie Goodman,Andrea Montanari, and Armin Peter provide an introductory articleon covered bonds, a form of financing in which mortgages and otherloans remain on a bank balance sheet, collateralized by a “cover pool.”The authors describe recent legislative and regulatory steps taken inthe United States to get the covered bonds market started. Theyexplain that covered bonds are not a panacea for recent problemswith MBS but are still likely to occupy a niche in the market.

Hylton Heard and John Bella give us an update on auto loanABS, recently the second-largest ABS class (behind credit cards) inissuance, through an analysis of the credit fundamentals that determinecurrent auto loan ABS ratings. They point to increased net loss ratesin the current economic environment. Martin Nance then gives ussome insight into the credit derivatives market through a descriptionof the “credit derivative product company” and the needs it satisfies,which include acting as credit backstops for dealers in credit defaultswaps and as counterparties to absorb banks’ mark-to-market risk.

VOLUME 14, NUMBER 3 FALL 2008

HENRY A. DAVIS Editor

HARRY KATZ Production and Technology Director

IAN AU Senior Marketing ManagerSEGAL BENGIGI Digital Business Development

Manager

PETER JUNCAJ Head of Subscription SalesRENEE CHEN Account Manager

ROBERT FRANKEL Account Manager

DEWEY PALMIERI Reprints Manager

ROBERT TONCHUK Director, Central Operations and Fulfillment

KELVIN LOUIE Senior Fulfillment ManagerEMPERATRIZ MIGNONE Fulfillment Manager

STEVE KURTZ Director, Finance & Operations

JUSTIN GLAZER Management Accountant

DAVID BLIDE Associate PublisherSAMANTHA RALPH Advertising & Marketing

Coordinator

ALLISON ADAMS PublisherCHRIS BROWN President

GARY MUELLER Chairman & CEO

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Finally, we have a section of five articles that explain how securitization servesinsurance companies’ risk management and fund-raising needs. Ray Johnson andDavid Booysen explain the underpinnings of a life insurance company’s businessmodel, introduce us to life-linked financings, show how capital markets can be usedto finance insurance company needs, and discuss the benefits and opportunities oflife-linked investments for issuers and investors. Then Alison McKie shares anotherview of how the capital markets are used to absorb insurance and related financialmarket risks for an insurer or reinsurer; she describes three categories of life-insur-ance-linked securities: catastrophe cover; embedded value; and financing transac-tions, such as redundant reserve financing. Nick Potter and Michael McDonnellexplain the legal structures for statutory reserve financings and embedded valuemonetizations, the two types of life-insurance-based securitization that have pre-dominated in the market to date. Malcolm Wattman and Matthew Feig then explainhow catastrophe bonds, or “cat bonds,” provide reinsurance protection for natu-ral catastrophe risks while also providing an important opportunity for investorsto diversify away from credit and interest-rate risk. Finally, Morton Lane comparesreinsurance in the capital markets with traditional reinsurance mechanisms; heexplains why traditional reinsurers earn higher returns on capital but also why cap-ital markets reinsurance is playing an important and growing role in the market.

Henry A. DavisEditor

2 THE JOURNAL OF STRUCTURED FINANCE FALL 2008

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