Could JPM possibly be talking its own book? Just maybe? If the CLO market is substantially damaged, so is JPM’s main business.

The FT should have mentioned that.

Why?

A. There were thriving real estate and automotive markets during the early years of this decade, creating a large pool of collaterizable assets. That’s history now.

B. The word of the ratings agencies, a key component of the process, was still sacrosanct at that time- forget about that.

C. Without the opportunity to earn big fees, much of the push from the sell side(don’t worry, we’ll figure ut a way to make your income look better) will evaporate- that’s a good thing.

“…Again, I’m not sure why this is a problem…”

Hmmmmm, seems obvious to me.

Of course, and that’s a very good thing indeed for the industry. I’ve said time and time again that investors not doing their homework was the single biggest cause of the crisis.

“Logic tells me that this will reduce or eliminate most of the opportunity for middlemen to tack on anything but minimal fees. “

Again, I’m not sure why this is a problem. There was a thriving market in perfectly transparent deals before the crisis, and there’ll be a market of sorts for them after it. People seem to have this idea that the whole of securitisation is based on smoke and mirrors and exists only because investment banks make huge profits from it. That may be true for a minority of structured products (again, on a global basis), but the rest of them have solid reasons to exist from both the buy side’s perspective and the sell side’s. Banks already work on securitisations where all the hard work is done already (most large UK lenders, for example, structure their own deals and just hire the investment banks to sell them). Margins aren’t very big in the corporate bond market or the senior unsecured FIG market either. People still do deals. Why should securitisation be different?

“Possibly in other less regulated markets (that don’t have GSE’s and their associated rules and regulations…”

Not having GSEs doesn’t mean that they are less regulated markets. The UK regulates mortgage brokers, for instance, and every lender is obliged to demonstrate a loan’s affordability (how this works in practice is another matter). Other markets regulate prime mortgages far more tightly than the US or the UK, but simply don’t have a secondary finance system. The point is not one of regulation, it’s that in many jurisdictions, there is no cheaper way to finance mortgages (outside of short term solutions such as deposits or central bank repo) than securitisation. That’s changing as covered bonds become more widespread, but only a handful of countries, almost all in Western Europe, have legislation for them.

OMG, whocouldanode that offering junk bonds with a bullshit moody’s AAA rating would lead to suspicion of all bonds.

I think you missed Skeptical’s point entirely. Hopefully he won’t mind if I clarify his point as follows:

“…unless the VALUATION OF assets that go in structured vehicles is sound, the vehicles themselves hardly matter. So saying securitization will come back with a vengeance – or not – is irrelevant until there is something worth packaging…”

Let me draw an analogy to what happened to the real estate market during the early 1980’s. Back then the “Limited Partnership” structure became a popular vehicle within which to structure real estate deals. Since they were relatively new to most investors, an (ill-informed) implicit understanding came about that these new type of entities were so successful in the early years because the Limited Partnership Structure could somehow turbo-charge the deal (in reality the only thing turbo-charged were the sales of the partnership interests and syndication fees).

I had clients during that period who (were normally conservative) bought into a few of these deals without any idea of the quality of the underlying assets. With the benefit of 20/20 hindsight it became clear that these folks would have never invested if the had a clear picture of the quality of the assets, cash flow potential , the huge upfront costs incurred to acquire the assets and structure the deal, etc. Some of them admitted they might have been mesmerized by the excitement of owning an interest in a LP. Granted there were other significant factors that finally crashed the real estate market back then such as 1986 tax Reform Act. However, it was also a previous case of lack of transparency of underlying assets in the partnership deals that helped led to that real estate bubble.

Ginger, back to your assertions “….My point is that there are still plenty of assets worth packaging. Most countries don’t have Fannie Mae and Freddie Mac. Banks in those countries have to finance prime mortgages somehow. And there are plenty of other assets to choose from – auto loans, credit cards, SME loans, corporate loans, insurance risk etc…”

I agree that there are probably plenty of assets worth securitizing. But clarity and simplicity will be the theme for US deals. People will become much more proficient at seeing through the structure of the deal, and be able to judge the quality of the assets, risks an terms of a deal regardless of structure (as they have with LP’s). Logic tells me that this will reduce or eliminate most of the opportunity for middlemen to tack on anything but minimal fees. Possibly in other less regulated markets (that don’t have GSE’s and their associated rules and regulations these structures may provide higher profit potential. But that’s not a selling point of which one should be proud.

BTW- Did you hawk real estate syndication deals in a past life?

In a lot of cases, the problem isn’t that people have a problem with the assets, it’s that cashflows generated by the assets wouldn’t support the spreads on a securitisation in the current market conditions. In other cases the assets would support the spreads, but the originator has other funding options. As and when spreads recover (obviously not to immediate pre-crisis levels, but to levels commensurate with the risks involved), those problems will gradually dissipate and you should see a normally functioning, though much smaller securitisation market.

Anecdotally it seems the more gray hairs you have the more worried (justifiably) you are of current conditions.

In addition to the credit bubble, housing bubble, is there also a hubris bubble? As everyone born after 1965 doesn’t really have a meaningful concept of a serious recession. Perhaps this is coloring the still optimistic earnings estimates and economic forecasts?

Just some random rhetorically questions that are bugging this thirty-something.

Cheers.

Very little, in the long run. Most people expect the ECB at least to turn off the taps at some point, probably by tightening eligibility criteria. Indeed, there are many who have argued that the ECB in particular has exacerbated the situation in the ABS market, by allowing banks to continue to price their assets at unrealistic prices, which then can’t be publicly securitised.

Also, if we’re counting securitisations that have just been held for repo with central banks, then 2008 issuance is already far higher than 2002-3 levels. When I talk about a recovery, I mean sale of securitisations to private sector investors.

In the short run, however, the recovery is indeed very dependent on central bank liquidity. That support means investors can be confident they’ll be able to “sell” a piece if they need the cash, without taking too much of a hit. This makes them more willing to buy with mark to market worries hanging over them. And it applies to banks and non-banks alike – real money investors like to know that they can sell their holding to a bank. That’s going to continue to be the case until banks recapitalise and start buying in large volumes again (and they will – triple-A securitisations are very attractive under Basel II, even on balance sheet), and real money investors get confidence in assets, ratings and valuations, which may take considerable time.