Wednesday, February 22, 2012

PIMCO to quit structured finance trade group

According to a Bloomberg article, PIMCO is going to quit the American Securitization Forum (ASF), a structured finance trade group, because it does not fairly represent the opinions of investors.

This is not surprising given that ASF was created by the sell side's lobbying group Securities Industry and Financial Markets Association (SIFMA).

As PIMCO has undoubtedly experience through its participation in the ECB's ABS data warehouse initiative, the Association for Financial Markets in Europe (AFME, another offspring of SIFMA and the former European Securitisation Forum) is just like ASF.

Based on the contributions that I have seen made by ASF, AFME and SIFMA to restarting the structured finance industry, it is clear that they are fighting to retain the current level of opacity in structured finance securities and the sell side's informational advantage.

For the last four years, your humble blogger has used a brown paper bag to show the current level of opacity exhibited by structured finance securities.  Simply put, market participants do not have access to current data on the performance of the underlying collateral.  Without this data, they are not investing, but gambling on the contents of a brown paper bag.

My solution has been to require all structured finance securities to provide observable event based disclosure.  An observable event for the underlying assets includes a payment, delinquency, default, bankruptcy or restructuring.  The day an observable event occurs, it is disclosed.  As a result, market participants always have access to current data on the performance of the underlying collateral and can value the structured finance security.

Pacific Investment Management Co. is quitting the American Securitization Forum (0150170D) after the trade group declined to issue a statement about investors’ views on the nationwide foreclosure settlement this month by five banks, two people with knowledge of the matter said. 
Pimco, manager of the world’s biggest bond fund, informed ASF Executive Director Tom Deutsch of its decision in early February, said the people, who requested anonymity because the talks were private. 
The episode underscored Pimco’s concern that the trade group doesn’t advocate for debt buyers as well as banks that underwrite mortgages, the people said....
This is not surprising because the lineage and heritage of ASF and AFME is as a direct descendent of the sell-side lobbying effort, SIFMA.
The ASF, which counted Pimco Managing Director Daniel Ivascyn as a board member, was founded in 2002 as part of the Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group. In 2010, the New York-based ASF decided to become independent of Sifma. 
Bondholders asked the ASF to publish a press release on their views of the pending foreclosure settlement after being denied last month by Sifma, which cited the “potential legal issues involving the commercial interests of many of our members.” Both organizations include banks that sell, underwrite, service and trade debt. 
U.S. Housing and Urban Development Secretary Shaun Donovan told reporters Feb. 9 that “a relatively small share, in the range of 15 percent, of the principal reduction” for homeowners resulting from the settlement will come from investor-owned loans. 
“Nothing in it requires any trustee or servicer to reduce principal where it’s not allowed legally by the underlying documents,” Donovan said. “The misunderstanding somehow that investors will be paying the banks’ share is just false.”

The ASF is among groups vying to influence policy makers amid the largest financial regulatory overhaul since the 1930s and following a crisis triggered partly by securitization, the packaging of assets such as mortgages into bonds. 
The organization helped spur industry-led reforms meant to revive the almost-frozen market for home-loan securities that aren’t backed by the government. In August, for example, its “Project Restart” initiative offered suggested best practices for new mortgage-bond contracts to aid in dealing with claims of faulty loans....
Based on my experience, there is a gap between actual best practices and what the trade groups claim are best practices.

For example, best practice for tracking a loan portfolio is observable event based reporting and monitoring. It is what banks do internally and it is how loan databases are designed to operate.

However, the trade groups represent that once per month disclosure is best practice (this is the frequency of disclosure for opaque, toxic subprime mortgage backed securities).  Clearly it is not because the supporting information systems are capable of reporting on an observable event basis.

To regular readers, it appears that the trade groups are trying to retain opacity in structured finance and protect Wall Street's informational advantage.

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