Stage 1:  Sowing the Seeds of a Banking Crisis (no ABS/CLO market because assets are not priced at market levels)

• Government puts banks in a special position, with protections and constraints intended to steer capital in the economy to favored sectors
• Lending according to non-market criteria
• Biased pricing leads to overborrowing by favored companies
• Debtor problems and failures, and rescues, weaken local financial institutions

Stage 2:  Recapitalization of Companies and Banks (outside funds managers may initiate securitization of traded assets)

• New capital is needed by companies and banks
• Minority investors unwilling to entrust their funds to companies with poor governance
• Minority investors reluctant to invest in weak banks that are under pressure to assist in bailouts
• Foreign direct investors seek control; domestic majority owners unwilling to cede control, so corporate restructuring is delayed
• Domestic financial institutions further weakened; mergers are encouraged
• Foreign banks, seeking a local banking franchise, purchase controlling equity stakes in domestic financial institutions if bad assets are ring fenced
• Vulture fund investors "cherry pick" good financial assets
• Arbitrage funds managers initiate securitization of hard currency bonds -- CBOs (Collateralized Bond Obligations) of high yielding corporate and country debt -- because these are priced very cheaply relative to their risk

Stage 3:  Restructuring of Companies and Banks (using the ABS market as a funding source)

• Companies and banks allowed to fail with loss of assets, jobs and control
• Public sector restructuring agency may securitize loan portfolios of troubled or failed banks
• Securitization of good loans, initially with third-party credit enhancement
• Securitization of bad loans, initially with recourse or substantial subordination/first loss risk held by selling institution, again initially supplemented by third-party credit enhancement
• Separation of funding from risk-bearing -- ABS investors are willing to purchase CLOs (Collateralized Loan Obligations) as long as someone else is bearing the risk
• Some local currency assets amy be securitized, with swaps provided by prime banks, but investors almost entirely nonresidents

Stage 4:  Initiation of Broad-Based Securitization (companies and banks use the ABS market as a means of transferring risk as well as a funding source)

• Legal changes enable the establishment of special-purpose securitization vehicles and perfected true sale of assets
• Select companies and banks experiment with securitization
• Non-loan securitization begins to be used by companies as an ongoing funding source
• Local currency securitization matures
• Local rating agencies develop expertise in grading ABS
• Domestic investors become familiar with the technique
• ABS investors willing to take some credit risk by purchasing subordinated tranches or non-triple-A ABS
• Securitization includes a widening range of assets, such as automobile loans, consumer credit (including credit cards), mortgages, leases and commercial loans

Stage 5:  Entrenched Securitization (companies and banks routinely rely on securitization of assets, and price loans on the basis of the ABS market)

• ABS investors can choose and compare and trade, creating established market pricing for different classes and ratings of ABS
• ABS market drives availability and pricing of loans and bonds, enabling banks to make consumer and corporate loans confidently -- they know that of they price the loans in line with the ABS market's requirements, they will be able to obtain funding and transfer the risk by securitizing the assets.
• Securitization of primary bond issuance
• Securitization of primary loan issuance