Loan pass throughs March 11, 2013 at 10:01 am

Mortgage backed securities began with pass throughs; these were simply bundles of mortgages in security form. The PT did what it said on the can, passing through payments on the underlying mortgages to the security owner, perhaps after a servicing fee has been taken. Only later did trenching come to the MBS market.

Now, it seems, pass throughs are coming to the corporate loan market. In particular, some European banks are trying to develop a repo market in corporate loan PTs. Nothing has, I understand, been done yet but the ambition is there.

Perhaps some of the lessons of the CDO market have been learned: certainly a PT with full transparency over the underlying loans is simpler than a tranche of a high grade CDO, especially a managed one. But nevertheless this is shadow banking, and one might worry about the procyclicality of haircuts.

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