Friday, March 30, 2012

Searching for muppets, the sell-side says its ok to chase yield and buy opaque securities

Having loaded up their balance sheets with opaque toxic structured finance securities, the sell-side turns to the mainstream media for help finding investing muppets.  Without questioning the message, the mainstream media 'reports' that it is ok for the buy-side to chase yield and buy these securities.

So what exactly has changed about these opaque toxic structured finance securities since investors were chasing yield and buying them before the beginning of the financial crisis?


They are still opaque.  A buyer of these securities is simply blindly gambling as the lack of current information on the performance of the underlying collateral makes it impossible to know what you own.

On the other hand, Wall Street has an informational advantage when it comes to these securities.  The source of this informational advantage is their ownership of the entities servicing the underlying collateral.  Wall Street can get regular updates on how the underlying collateral is performing  that are not available to investors.

Hence, only an investment muppet would buy a security that they cannot value and Wall Street can...

From a Financial Times article,
Allen Appen, head of European financing solutions at Barclays Capital, says it has taken time for the stigma attached to many European securitisation deals since the financial crisis to recede and for investors to realise that mortgage loans from Dutch and British markets have in some cases performed better than other funding instruments. 
While some European investors have been unwilling to return to the European RMBS market, a few large US banks, some of which were active before the crisis, “are now hugely acquisitive and driving the secondary market,” Mr Appen says. More recently there has been interest from large Japanese banks. 
The scale of US investor appetite can be seen in the frequency and size of dollar tranches in the new issue market, says Gareth Davies, head of European asset-backed securities and covered bond research at JPMorgan. Relative to US securitised products, the UK and Dutch markets offer more attractive value for investors, he says. 
A three-year UK, dollar-denominated RMBS transaction would print at about 140 basis points over Libor, the benchmark interbank borrowing rate, compared with its nearest US equivalent credit card-backed securities trading at nearer 14bp. 
In the US, some of the securities at the heart of the financial crisis – bonds backed by home loans struck during the boom years of the past decade – have rallied sharply this year. Amid rising hopes for US economic recovery, they have benefited from investors’ voracious appetite for yield while official benchmark rates remain very low.
But growth of the European securitisation market, and RMBS in particular, is still heavily constrained. Proponents argue that regulators have “tarred all securitisation products with the same brush”. They say the problems coming out of the US crisis related to bad loans and not to the products themselves....
Naturally that is what the sell-side and its industry trade groups would say.  They benefit from the inability of investors to be able to assess the risk and hence properly value these securities.

The products themselves are fundamentally flawed.

They are designed to be opaque.  By design, investors do not receive all the useful, relevant information in an appropriate, timely manner so they can make a fully informed investment decision.
Rick Watson, head of capital markets at the Association for Financial Markets in Europe [an affiliate of the sell-side's lobbying organization], ... says there continues to be “a misunderstanding about the differences between various securitisation products and the risks they carry”. 
How true.  Opacity guarantees that there is no way the investors can understand the risks of the various securitization products.
Work is under way on a labelling scheme that would help investors identify the highest-quality securitisation products.
Adding a label does not change whether an investor has access to the data they need in order to know what they own.

Adding a label through the Prime Collateralised Securities (PCS) initiative is simply a sell-side effort to repackage a product that is designed not to provide investors with the data they need in order to monitor or value the security.
Rebranding efforts aside, there are more fundamental issues.... 
Yes, opacity is a much more fundamental issue.

No comments: