Monday, October 29, 2012

Sell-side recommends that UK create equivalent of US housing agency to issue asset-backed securities

In its latest effort to sell opaque securities, the Association for Financial Markets in Europe, a sell-side lobbying organization, has proposed that the UK create the equivalent of the US housing agencies to issue asset-backed securities.

Under the AFME's blueprint, the UK would create a new agency for business lending that would guarantee securities backed by loans to businesses.

Why would the UK taxpayers want to take on credit risk when there is an easy way to restart the market for securities backed by loans?

Regular readers know that restarting this market requires that the securities provide observable event based reporting on all activities like a payment or delinquency that occur involving the underlying collateral before the beginning of the next business day.

With this information, investors could independently asses the securities and buyers would know what they own.

As reported by the Sunday Times,

A BLUEPRINT detailing how to kickstart lending to businesses by deploying the dark arts of casino banking has been handed to George Osborne and Vince Cable. 
Under the scheme, Britain’s 21,500 medium-sized companies would be given the tools to gain access to the international financial markets. 
Loans would be pooled by a new Agency for Business Lending, nicknamed ABLE, which would package them into different types of bonds and sell them to investors. The bonds would be backed by a government guarantee. 
The paper proposes using many of the financial engineering tactics blamed for causing the credit crunch. But it argues that the international markets would bring new sources of stable funding for UK firms and free up the balance sheets of domestic banks, allowing them to lend more.

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