Reviews of The Analysis of Structured Securities:
Much has been written about structured finance and rating, but nothing compares to this truly unique book. To my surprise, I could not put it down, as each chapter beckoned of more to come. The authors lay out solutions to the practical problem of rating debt securities in the structured finance context. They do so by explaining and analyzing with brilliant simplicity the theoretical foundations of rating.
In the practical context of structured finance and rating of debt, they guide the reader through complex theories for predicting the future, explaining their strengths and weaknesses, and ending with an original theory of their own. This book is a “must read” for anyone involved in structured finance. In light of the recent market failure, securities rating is indeed of interest to many investors. In fact, this book offers fascinating reading to anyone interested in the ways we seek to predict the future.
Professor of Law
This is an extremely informative book. Each page is rich with institutional detail and analytical insights. Raynes and Rutledge are clearly very experienced and knowledgeable practitioners on a mission-to bring a new level of analytical depth and precision to pricing, portfolio management and other decisions in the brave new world of structured finance.
The middle chapters capture some very advanced thinking, and the case studies at the end are very substantive. The reader who masters this book will be well prepared to address the important issues in today’s structured securities markets.
Perry D. Quick
Vice President, Charles River Associates
1201 F Street NW, Suite 700
Washington, DC 20004
The Analysis of Structured Securities is a much needed text book covering an important and growing segment of capital markets. The authors combine rich institutional knowledge with illustrative examples that make the topic especially accessible. For the more technically inclined there are chapters that address the modeling issues in greater detail. I recommend this text to serious students in fixed income markets.
Chase Manhattan Bank Foundation
Professor of Financial Institutions Columbia University
I became aware of the authors through a colleague who was taking one of their classes at NYU. The homework assignments (on which I “consulted”) were interesting, comprehensive, and touched on a number of important subjects, so I bought their book. The Analysis of Structured Securities – Precise Risk Measurement and Capital Allocation provides reference and background material on a number of quantitative ABS analytic tools, some of which I was familiar with and some which I should have been. Matrix math, eigenvalues and eigenvectors, Markov chains, Cholesky decomposition, Tchebychev polynomials, covariance and correlation and numerous other statistical techniques are addressed as ABS analytical techniques and not as mathematically rarefied numerical analysis procedures. But what I found most valuable was the focus on reduction-in-yield as the benchmark metric for ABS credit quality. Rather than credit ratings being an ex ante, handed-down-from-on-high, assumed-to-be-valid-within-a-notch-or-two inputs (which, I blush to admit, is how I too often think of them), the book points out how credit ratings should be thought of as a continuous, dynamic variable, interacting with the coupon, yield, prepayment vector, default vector, and triggers. The interactions are determined by cash flow modeling and Monte Carlo simulations, using the techniques mentioned above. Given this framework and tools, the book discusses how to efficiently optimize the structured security. I have had ABS issuers ask if there were not a way to optimize securitizations beyond what they suspiciously perceived as Wall Street cookie cutter structures. Previously, I have just shrugged. Now I know how to help them.
This intense and well-written book is actually two distinct pieces, appealing to two different audiences. Both are effective, but separate in most cases.
The book’s aim is said to be (to show) “that presented with a capital-efficient, unified analytic approach, the market will find…..the motivation to operate at higher standards of precision, making the prospect of real commodity credit risk management is possible ” (ref: Preface, (ix)). In Part I, The Contemporary Framework, Part II, Analyzing Structured Securities and Part III, Applications of Numerical Methods to Structured Finance, the authors present a succinct and very readable overview of structured finance, its major elements, risks and analytic tools. In Parts IV and V, Case Studies and Advanced Structural Features, they provide an alternative approach which should permit the desired new “credit risk management” paradigm.
Experienced practitioners will likely skip over the first three parts. To the beginner (like the reviewer), the reading was invaluable. The last two parts are provocative and potentially revolutionary, but require a degree of knowledge and experience which limits their readership to a relatively small group of market practitioners who actually understand the “guts” of their speciality. It is this dichotomy which leads to the proffered description of the book as being two pieces for different audiences.
That having been said, if the reader has the time (or the need) to go from the elementary to the complex, the entire journey of the book can be achieved . In many cases, the authors would help the beginner by including more cases studies or detailed expositions in the appendices and citing references to relevant readings. I took off about six weeks from the book to study the introductory topics in greater detail. And I found there was a sufficient mass of such material that the authors might consider breaking the book into two and expanding the first part into a larger introductory text book.** The transition to the second part made me encounter heavier reading and I freely admit to requiring multiple rereads (and not an insignificant number of references to my graduate school quant books). In the end, I did grasp the message the authors intended (I hope).
Overall, I feel that of the literally ten thousand plus pages I have read on this subject in the last 6 months, the four hundred odd pages of The Analysis of Structured Securities represent the best investment of my time.
I liked this book because it’s useful for people with various levels of structured finance knowledge. The first few chapters explain the thought process behind the rating process and provide an introduction into the structured finance world of thinking. The second half goes into more depth about actual rating processes. The third part addresses asset specific issues (auto, airlines, etc…) While the last few chapters of the book review more advanced methods of analysis.
For people with little or no knowledge of the structured finance field, the first half of the book will provide a good understanding of the subject, the 2nd half of the book will probably required more time and effort to fully appreciate its value.