Securitization, at its most basic, is a sound financing technique. This is my basic tenet for today’s blog. With the ABS markets again beginning to pick up, spreads tightening and investor demand growing but supply still limited, it is time for a revisit of just what makes this market so important from a corporate perspective, and why it is way-past time for stakeholders to get it right in rebuilding the market.

I am not here to argue the validity of the regulatory arbitrage that drove the market to such great heights before the crisis. In fact, that is most definitely one of the things that should be addressed as the new world of securitization takes shape. What I am here to argue is the validity and soundness of securitization at its most basic, as a financing structure for corporates.

Large US banks have reduced hard-to-value Level 3 assets since the beginning of the year, according to quarterly filings, but it doesn't mean their balance sheets are in better shape.

The decline was modest for some banks, especially compared with the sharp improvement in 2009 when banks raised equity and reduced leverage. In addition, the recent requirements to consolidate off-balance sheet vehicles helped remove some assets from the Level 3 bucket--but only to reclassify them under different categories on balance sheets.

This trend has now reached California, so it's about to become a whole lot more meaningful.

Again, this may be a matter of paperwork, but at minimum, it seems like banks will have to spend time and money straightening out their claims to homes on loans they've securitized.

A recent court decision involving JPMorgan and Mexican cable operator Empresas Cablevision sent another blow to the securitization market, and especially to collateralized loan obligations (CLOs), but gave more of a say to borrowers when lenders want to pass on their loans to others. It could have a broad-reaching impact on structured financings.

At the end of July, the US District Court for the Southern District of New York invalidated a participation granted by JPMorgan to another bank in a loan from JPMorgan to Cablevision. The terms of the loan allowed participations, but the court recharacterized the participation as an assignment-which required the borrower's consent.

Congress is finally working on a bill on covered bonds, hoping to boost investor demand and give banks another route to fund some of their loans. But if passed in its current form, the bill will have some flaws, including insufficient overcollateralization and inconsistent regulatory regimes for different types of issuers.

The House of Representative Financial Services Committee sent the United States Covered Bond Act of 2010 to the floor of the House last week.

The main three credit ratings agencies have told Wall Street in recent weeks that underwriters won't be able to use their credit ratings in documents selling asset-backed securities for fear of being sued.

While it has already placed the ABS market on hold and has securitization professionals up in arms, there are several ways for banks to continue to sell ABS going forward.

The Federal Deposit Insurance Corp.'s proposed treatment of assets transferred to bank-sponsored securitization vehicles in case of receivership or conservatorship is the latest move by regulators that raises questions about the viability of the securitization market.

The FDIC's so-called safe harbor rule legally isolates bank-sponsored securitization from the sponsoring bank's failure, and allows the securitization vehicles to be rated on the basis of the quality of the underlying assets and the securitization structure rather than the stronger rating of the sponsoring bank. As a result, investors will bear the brunt of losses.

The Morgan Stanley case may not go as far as the one involving Goldman. And it is way too early to know what exactly prosecutors would charge the firm with doing.

But it's possible to venture a guess based on Yves Smith's observations today at Naked Capitalism.

All types of asset-backed financing faced some issues during the crisis, and asset-backed receivables finance is no exception. Regardless of the strength of the underlying collateral, investors pulled away from any type of risk that had the stench of ABS and either held onto their money or put it in products perceived as more secure.

As a result, receivables securitization and asset-based lending saw issuance drop and spreads widen during the height of the crisis. Yet the strength of the underlying collateral shone through, and even being touched by the taint of monoline involvement hasn’t stopped new issuance and new receivables-backed models from returning to the fore.

Credit enhancement used to be the magic tool in securitization to minimize losses and boost the quality of collateralized debt obligations. But as the Abacus deal underwritten by Goldman Sachs has showed, such practices often led to overleveraged, overly risky transactions, which turned into losses for all parties, including banks underwriting CDOs, once the market turned against them.

"Synthetic CDOs bring together a number of different factors which ultimately resulted in catastrophic losses for all involved," said the Aite Group in a report on synthetic CDOs this week. Even underwriters, who often kept super-senior tranches on balance sheets, suffered heavy losses.