Regular readers know that it is only transparency offered by observable event based reporting that is adequate to restore investor confidence.
With observable event based reporting, any observable event with the collateral backing a structured finance security is reported to investors on the business day after it has occurred. This way investors always have current collateral performance information and can know what they own.
An observable event would include, but not be limited to, a payment, delinquency, default, modification, substitution/buyback or bankruptcy filing.
A revival in the much-maligned securitisation market remains key to solving the financing dilemma in Europe's corporate sector, according to analysts at Goldman Sachs...
The market for asset-backed securities seized up after the financial crisis as investors reeled from losses tied to toxic products including collateralised debt obligations.
New regulations are forcing global banks to hold more high-quality capital on their balance sheets against riskier assets, including residential mortgage-loans.
In a research note this morning, Goldman Sachs said that asset-backed securitisation, or ABS, would go a long way to solving European corporates’ financing quandary. ABS involves a bank taking an asset - such as its residential mortgage loans - off its balance sheet and creating a security backed by those assets that is then sold to investors.
The bank said: “A rebound in securitisation activity could make it easier for the euro area private sector to digest bank deleveraging. For this to happen, however, there needs to be an increase in appetite among investors for ABS."
But Goldman Sachs's analysts said the reputation of the securitisation market was still a problem for investors.
They wrote: “One reasons for the lacklustre growth in ABS issuance can be traced back to the bad experience investors had during the credit bubble. More transparency may therefore be needed in order to restore sufficient confidence in this asset class.”
Goldman Sachs has itself felt the ire of investors stung by the ABS markets. In April 2010, the US Securities and Exchange Commission filed a civil suit against the bank for alleged wrongdoing in a sale of collateralised debt obligation called Abacus 2007 AC-1.
The regulator said that the bank omitted to tell investors that its client, hedge fund manager John Paulson of Paulson & Co, was betting that the sub-prime securities underpinning the CDO would default.
Ninety-nine percent of the portfolio has since been downgraded and investors are alleged to have lost more than $1bn, according to the SEC. The suit was settled for $550m in 2010....The Abacus deal shows why investors are on a buyers' strike and won't return to the ABS market without the current information on the underlying collateral performance that can only be provided by observable event based reporting.
Without this information, investors are unable to assess the risk of an ABS deal. As a result, buying an ABS deal is blindly betting.
The Abacus deal showed that when investors blindly bet against Wall Street they are likely to lose a significant amount of money.
The bank said in its note that "a further retrenchment in bank lending would pose a significant downside risk to economic growth in the euro area".