The business world has become a competitive market pushing people to look for other ways of earning revenues other than the normal operations of a firm. Investments are examples of ways through which an organization can generate more income. The undertaking is carried out with the hope that the value of the item purchased or the area the money is put in will appreciate in value thus lead to more returns. Financial gain is the primary reason why people go into business and therefore extensive research should be carried out to determine the most viable areas to venture into or invest.

However, investments have become a common phenomenon among many people making people turn to other options that are equally or even more viable. One such example is the assets backed securities abbreviated to ABS. The concept has been in existence since the 1980s and is an alternative to the traditional corporate debt investments. However, the market for ABS took a nose dive in 2009 and various reasons lead to the outcome. The paper will give insight into what the ABS entails and how it expanded in the market and the reasons that resulted in the collapse of the same.

Any economy requires a bond market to ensure there is the growth of companies and economic development by providing liquid cash for the activities to take place. Also, the government invests in the market an undertaking that results in low tax rates in a country because of the alternative areas of gaining revenues. It is evident that the markets are significant in any nation. In understanding, the bond market, the concept of the assets backed securities comes up. ABS is generated from bringing together non-mortgage assets. In business, assets are defined as items or valuables which possess an economic value and are owned by the company. They can either be tangible or intangible in nature.

Loans, credit card debt royalties or any other non-mortgage assets are what back up the ABS securities, a factor that differentiates it from mortgage-backed securities. The former evolved from the latter. Mortgage-backed securities were as a result of the surging of the interest rates in the 1970s and lead to the lesser earnings than deposits on the residential mortgages. ABS are better than MBS because they are not influenced by the fluctuations in interest rates. The investor, seller, and issuer are the three significant parties that are involved in the structure of ABS. Issuers are the people or organizations that buy loans from sellers. Before considering an ABS, it is necessary that a valuation process takes place to ensure the bond security’s price and spread are determined. A process where liquid financial instruments are converted from the non-mortgage assets is called securitization. The selling and creation of the securities are carried out by the special purpose vehicle, SPV. (Cerrato)

One of the reasons that lead to the rise of the market is the fact that the burden of credit risk by banks is reallocated outside the financial system. Banks provide loans to its customers to help them improve their financial status by empowering themselves economically. In some instances, some individuals may fail to repay the loan and thus result in the risk of loss of principal. To avoid such an occurrence, securitization of the ABS enhances the management of liquidity and credit risks (Brunnermeier). Off-balance, sheet treatment is another reason that pushed for the expansion of the market and which is an advantage to issuers. For instance, for a bank or any financial institution to remain solvent, it is required to maintain particular assets by their financial regulators. However, with securitization, the burden of regulatory capital is freed from the institutions. The factor pushed most commercial organizations to join in the market.

However, even with the advantages that resulted from engaging in the market resulting in its rise, the market for asset-backed securities still collapsed. The subprime mortgage crisis is termed as the primary cause of the decline in the market. Homes experienced a decline in their prices and led to foreclosures, delinquencies of mortgages and securities that were related to housing faced devaluation. A country wide emergency in banking was what explained the situation which was worsened by the recession. Many parties were blamed for the occurrence. They included the financial institutions, the government, the credit agencies, regulators, customers and many others.

For instance, the investors were put on the spot because of their purchase of subprime mortgages and collateralize debt obligation (CDO) which were termed as complicated instruments. Even though the investors did not understand some of the investments they made, they had so much faith in securitizing of ABS that things would be bright for them. Refinancing of loans was a problem especially since there was an increase in subprime lending. The financial crisis led to slower economic growth since most people lost their jobs in the recession and the interest rates skyrocketed to counter the situation.

The financial crisis condition moved from bad to worse when the Lehman Brothers collapsed. The outcome is said to have contributed to the fall of the market in ABS because it resulted in soaring of securitized commodities and the coming to a sudden halt of the market activities. Of the investments banks in the United States of America, the Lehman Brothers Holding was the ranked fourth leading financial service firm in the country. Its involvement in the subprime crisis resulted in a mass departure of its customers and losses in stocks and all contributed to its collapse (Cerrato). The fall of the institution scared investors from venturing into the ABS market and instead opted for treasury bills which were considered to be more quality assets. Buyers were not available to purchase the ABS structures as the crisis pushed people away from them and nobody wanted to associate with them.

Information is power, and it is evident that people had so much faith in the ABS and little information on what it entailed. For instance, it is possible that some of the parties involved in the structure of the market did not know much about its operations. The insurer may have been more informed on the price of a security something that an investor had no clue about. The market for the securities was a profitable venture and individuals did not stop to think twice on any adverse occurrence. Though profit generation is what most businesses desire, firms should put in place measures that will counter any adverse instances should they occur in future. Also, just because a venture looks profitable does not mean it cannot collapse or fail. Before getting into any investment or money generating areas, it is important that extensive research is carried out in the area to prepare a person on how to handle the different situations that may arise.

In conclusion, though the market for the asset-backed securities is lucrative, its collapse was so bad that people and institutions decided to stay away from the market. The subprime crisis is blamed for the occurrence, but financial analysts argue that all the parties involved contributed to its downfall. Lenders gave money even to people who were not qualified for funds; homebuyers purchased homes which were beyond their financial capability because the conditions set were favorable and attractive for the undertaking. Every participant in the market of ABS is to blame for the subprime crisis that led to the collapse of the markets.