'Risky' is a term that is applied to investments where the buyers have access to all the useful, relevant information in an appropriate, timely manner and therefore they can independently assess the risk of the investment prior to purchase.
It would be far better to characterize all asset-backed securities as 'gambles' as any buyer of these securities lacks the useful, relevant information needed to assess the risk and is therefore simply blindly betting.
To characterise all asset-backed securities as “the complex, risky bonds at the centre of the financial crisis” is to tar an entire global sector with the poor performance of a legacy subset of the overall structured finance market.
UK RMBS (residential mortgage-backed securities) as an asset class, specified in your article, has actually demonstrated very good credit performance through the crisis and has outperformed many other classes from a secondary market price standpoint....According to the International Financing Review, UK RMBS performance is the result of JP Morgan's activities.
As one fixed-income head said, when selling European structured finance, the JP Morgan CIO “is your first call, your second call, your third call and your fourth call.”
“There are real questions about the strength of the market if they’re not there,” he added.....
A quick analysis of recent trading levels provides some insight into how the portfolio has appreciated so quickly....
Its first notable RMBS involvement, Permanent 2009-1, saw “an affiliate” of JP Morgan buying £1.25bn of the Class 2A at par.Apparently the outperformance in the secondary market reflects JP Morgan shuffling the bonds between entities it controls.
Given the importance of high-quality securitisations to the real economy, policy makers and central banks have been supportive of industry initiatives to restore investor confidence.
UK banks and building societies have continually improved transparency and reporting to improve the attractiveness of this product and the Bank of England has implemented market-leading loan-level disclosure on UK RMBS.I can appreciate Mr. Watson's efforts to claim that there is an industry initiative to restore investor confidence. Unfortunately, a sell-side led effort is not the same as a buy-side led effort.
Regular readers know that the buy side is on strike until it receives observable event based reporting. This has been clear since the financial crisis began.
Jamie Dimon fully understands the importance of observable event based information.
After all, he demanded it when he said "I want to see the positions" so that he could really know what JP Morgan owned with regards to the credit default swap trade. He wanted to see the current underlying position data and not the positions a month earlier or a summary report.
The buy-side is asking for current underlying position (collateral) data. It wants to be able to see the current status of the individual assets that make up each structured finance security.
Unfortunately, this is exactly the data that the sell-side through the AFME led initiatives refuses to provide.
Given the fundamentals, it is clearly an attractive investment product and certainly does not deserve the description meted out in your headline.Given the current fundamentals of this investment product, the headline should have read: JP Morgan has blindly bet $75 billion on securities in a market for which it appears to be the only buyer.