Shiller on complexity in financial products

And speaking of securitization, Robert Shiller makes an interesting point in his a recent piece in the Financial Times “In defence of financial innovation”:

New products must have an interface with consumers that is simple enough to make them comprehensible, so that they will want these products and use them correctly. But the products themselves do not have to be simple.

Intangible asset backed securitizations are likely to be complex. As we noted in our report Intangible Asset Monetization: The Promise and the Reality, such deals require a number of backstops. For example, a securitization of a trademark/brand needs to have an active management and marketed entity to ensure that the assets are protected and utilized to their fullest extent. Such deals are also likely to be “covenant-heavy” (in contrast to the covenant-lite deals of the recent bubble).

Thus, deals themselves are likely to be complicated. They don’t have to be opaque, however. Those who structure the deals should take Shiller’s point to heart. The deals need to be comprehensible. That will be the key to market acceptance: investors understand what they are buying.

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