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Thursday, April 07, 2005

Markets constantly evolve in the ways they allow participants to share risk. In recent years, hedge funds have exploded in popularity. A bit less recently (the last 15 years or so), asset-backed securities started becoming more and more popular. These innovations typically result in benefits to companies seeking financing. This from an article in the New York Times, titled Return Hungry Investors Snap Up Riskier Loans:

Corporate loans were once tightly held by banks. But over the last decade or so, the riskiest form of the business, known as leveraged lending, has been transformed to an actively traded market. Besides hedge funds, other large buyers of these loans now include managers of pools of loans known as collateralized loan obligations, which are sold to insurance companies and the like.
Click here for the whole article.

What impressed me about the process is that this loan market used to be primarily bank-driven. The securitization process allows the originator to "sell off" the risk to other investors (like hedge funds). Hence, they have more capital to lend. It's a pretty interesting process.

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