A Basic Introduction to Securitization

Based in St. Louis, James Giacin is the managing director of a financial firm in Missouri. Before joining the St. Louis firm, James Giacin worked as the principal at a firm in New York City. During his career as a financial professional, he has successfully executed over $1 billion in securitizations.

Securitization is a process through which various asset types (typically loans and consumer debt) can be combined and recategorized as securities with the capacity to generate interest. Securitization can give investors several advantages, though there are a few drawbacks.

The main benefit of securitization is the ability to liquidate illiquid assets. And unlike comparable investment products, several loan-based securities are backed by tangible goods. Finally, when debt is moved into a securities portfolio, it removes liability from the balance sheet.

That said, the drawbacks of the securitization process range from the risk of default on underlying loans to a lack of transparency regarding the specifics of all underlying assets. These issues can overlap when investors acquire debt with higher-than-advertised risk. If a loan holder defaults, the added security of tangible goods will not allow the investor to recover value from the asset.

Technically speaking, any asset can be securitized. Individuals considering liquidation through securitization should speak to an experienced financial professional.