Desperation for restarting securitization has set in across the EU.
In the UK, the Treasury and the Bank of England are pursuing a 'funding for lending' scheme while the Financial Policy Committee is considering reducing bank liquidity requirements. The involvement of the Bank of England in the 'funding for lending' scheme is occurring despite Mervyn King's objection to taking credit risk onto the central bank's balance sheet.
Meanwhile, the ECB is endorsing an ABS data warehouse that has indicated it will provide loan level performance disclosure less frequently than is available on opaque sub-prime mortgage backed securities. This less frequent disclosure is the equivalent of changing the challenge from valuing the contents of a brown paper bag with a label on it to valuing the contents of a black box with a label on it. In either case, buying the contents is blindly betting.
The ECB confirmed that it is being driven to take desperate acts like endorsing the ABS data warehouse by reducing the rating a structured finance security needs to qualify as collateral in an effort to increase funding to the banks.
Why is it so important to restart securitization?
Because securitization was the source of funding for loans to small and medium size enterprises and individuals with less than perfect credit prior to the beginning of the financial crisis and the precipitous decline in the securitization market. These loans are necessary for economic growth.
Who is funding the loans now in the absence of the securitization market?
Since the beginning of the financial crisis, the only balance sheet that has been willing to fund these loans has been the central banks. The ECB has taken on considerable exposure through both covered bonds and pledges of retained securitization transactions.
Bank balance sheets are not available to absorb these loans as the EU financial regulators have been pursuing a 9% Tier I capital requirement.
What does it take to restart the securitization market?
That each deal provide observable event based reporting on its underlying collateral. Any activity like a payment or delinquency involving the underlying collateral should be reported before the beginning of the business day after it occurs.
How come your humble blogger is the only one calling for observable event based reporting?
The sell-side doesn't want observable event based reporting as it benefits from opacity and the fact that the buy-side cannot value the securities.
The few investors left in the market cannot call for observable event based reporting as it puts their jobs at risk. Calling for observable event based reporting focuses attention on the fact that they are currently blindly betting and have no way to know what they own (see brown paper bag above). If the investors who provided them with funds realized this, they would undoubtedly want their money back and hence the asset management related jobs would disappear.
What that leaves is your humble blogger up against Wall Street. It really is an unfair fight. A guy with a non-verbal learning disability that makes it difficult to communicate with family members pitted against the highest paid salesforce in the world.
As I see it, I have all the advantages. With the brown paper bag and the clear plastic bag to show what is currently wrong with the industry and what it takes to fix it, I have an solution that a 5 year old understands.
1 comment:
Unfortunately like many things wrong with the UK and government at the moment and for many years gone by, us 'mere mortals' can see the common sense solutions, where as those in charge don't seem to.
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