Financial crises cause a lot of damage, and ill-conceived post-crisis measures, no matter how well-intended, can only magnify their effects. Examples abound. For instance, the Smoot-Hawley Tariff Act of 1930, a US law that erected trade barriers, is widely regarded as having added considerable strain to the world economy after the 1929 stock market crash. However, the Oscar goes to the British authorities: after the South Sea Bubble collapse (1720), they banned issuing stock certificates for more than a century.

Now enter securitisation. Granted, many transactions structured around subprime mortgages have performed disastrously. But blaming the current crisis on securitisation is ludicrous. Unfortunately, there is a real danger that a bad combination of public outrage plus politicians’ ignorance might end up producing just plain bad and counterproductive regulation.

To be clear: securitisation is just a technique to create securities by reshuffling the cash flows produced by a diversified pool of assets with some common characteristics. By doing so, one can design several securities (tranches) with different risk- reward profiles which appeal to different investors.

Of course, an erroneous assessment of the risk characteristics of the underlying assets, the use of faulty models to examine the merits of each tranche, or an imprudent reliance on leverage can lead to calamity This is what explains the debacle behind the subprime transactions. But this is not an indictment of the concept of securitisation; it just shows the devil is in the execution. That is why a host of other well thought out securitisations (such as those relying on senior bank loans or emerging markets debt) performed within expectations.

Unfortunately, credit derivatives (securitisation is an effective tool to design credit derivatives) are suffering from a public relations crisis. And the fact that Alan Greenspan was an ardent proponent of derivatives has not helped the cause. Worse yet, Warren Buffett coined one of the most celebrated (but utterly misleading) statements about derivatives: “weapons of wealth destruction”. This is, incidentally, somewhat ironic: Mr Buffett’s Berkshire Hathaway controls almost 20 per cent of Moody’s, the ratings agency, which, until recently, got half of its revenue from rating derivatives. In fact, these ratings, arguably, became “weapons of confidence destruction” for they undermined the previously held conviction that a triple A designation meant foolproof.

Curiously enough, there is a great deal that is wrong with current risk management practices. However, we don’t hear much about it. Indeed, the present crisis has been nothing but the mother of all risk management failures. However, in the public relations arena, risk management is doing just fine.

Now back to securitisation. First, keep in mind that by creating securities out of illiquid assets, securitisation increases liquidity. Second, for companies that have assets with predictable cash flows, securitisation provides an alternative form of financing. And third, lending institutions can use securitisation to manage the credit exposure more efficiently, which, in turn, allows them to make more loans. All these benefits are critical in a recessionary environment.

Finally, a useful analogy: civil engineers (a more level-headed bunch compared to investors, politicians, and regulators) have already dealt with this type of circumstance. Whenever an earthquake strikes, several multi-storey buildings collapse. In spite of this, nobody has ever called for a ban on skyscrapers. Quite the contrary, the response has always been rational: an examination of what went wrong with the buildings that failed, followed by improved construction and analysis techniques. In short, recognition of the value of the concept coupled with better execution. This has resulted in safer, taller, and more beautiful high-rises.

We need to learn from engineers to keep the good ideas alive and work on improving their implementation. Securitisation, if used properly, makes access to credit more efficient. Let us not make the mistake of fighting the next recession without the benefits of securitisation.

The writer is managing director of RW Pressprich & Co, the fixed-income broker/dealer