Bank Securitization Woes Only Beginning

We remarked last week that the FDIC had put forward a proposal for fixing the securitization market. To be a bit more precise, it was the FDIC’s plan, put forward for public comment, of the rules it wanted to have in place for banks to get “safe harbor”, meaning off balance sheet treatment, for their securitizations.

As anyone who had even slight contact with the business press no doubt knows, a whole raft of credit bubble era securitizations, particularly real estate and credit cards, have suffered losses far in excess of what banks and investors anticipated. The result, with real estate securitizations, is that almost all of the market ex government guaranteed paper is in a deep freeze. Worse, servicers, who were never set up to do loan mods (and by happenstance also make more by not doing mods) are operating to the disadvantage of investors and communities (as we have mentioned on previous posts, vulture investor Wilbur Ross, the antithesis of a bleeding heart, has demonstrated that deep principal reductions work and for viable borrowers produce better results for the investors than foreclosures). For credit card conduits, rather than let them flounder (banks desperately need to keep that pipeline open) banks have intervened to shore them up, raising serious questions about their off balance sheet treatment.

So right now, we have a securitization markets, ex the parts on government drip feed, or actively supported by the banks, that are in a wee bit of disarray. And the FDIC plan reveals an ugly little conundrum: what it takes to private real estate securitization safe for investors (in particular, twelve month seasoning of deals and a 5% retention, but there were other well though-out provisions as well) make it much less attractive to banks.

Now that might sound perfectly fine to most readers, but there was a reason loans started shifting off balance sheet in the 1980s: securitization was cheaper. If a bank held a loan, it had to put some equity up against it, and pay FDIC insurance on the portion funded by deposits. So banks had skinnier balance sheets all across the banking system and shifted loans to investors.

Now it may be that we have two unattractive choices: making the securitization market “less unsafe” (which seems to be the direction of the OCC ideas, which are getting vastly more MSM attention than the FDIC draft) or make it safe, which has the effect of making it much much smaller, and thus requiring banks to get bigger (in terms of their balance sheets). Bigger banks require a LOT more equity. Where will that come from?

So the inevitable result of more on balance sheet lending is less lending overall. Now many readers will regard this as a good solution, but they forget that this process of shrinking lending will be painful and is something policy markers are struggling mightily to avoid. This is the 21st century version of St. Augustine’s prayer, “Give me chastity and continence, but not jyet.”

One example of the discomfort that is resulting from this conundrum comes in tonight’s Financial Times. Citigroup is choking on some auto loans it would like to unload, but the securitization route isn’t open right now, and other possible buyers are not willing to bet on the market coming back to life (and note the implication: the pricing that Citi deems acceptable depends on the securitization market, neither Citi nor investors like the economics of owning and funding the loans):

The securitisation market’s failure to recover from its slump during the crisis is complicating efforts by Citigroup and other troubled financial groups such as AIG to sell unwanted assets and repair their balance sheets, bankers and executives say.

People close to the situation said that Citi had opened talks with private equity groups and hedge funds over the sale of $3bn-worth of car loans as part of its efforts to cleanse its balance sheet of billions of dollars in troubled assets….

However, some private equity groups and hedge funds that have looked at the assets said that the lack of a thriving market for securitised bonds, which are backed by cash flow from loans, made the assets less attractive. They added that the absence of a fully functioning securitisation market increased the uncertainty over how buyers could fund the loans once Citi’s credit facility expired.

“Private equity can’t make a bid on anything where the business model requires a bet that the external funding markets and securitisation comes back,” said the head of capital markets at a big private equity firm.

A second issue that is not getting the press it deserves is that banks are almost certain to take losses (and we don’t mean writedowns, as in recognizing impairments they arguably should have ‘fessed up to sooner, but hard dollar payments to third parties) on litigation and claims made under old mortgage securitizations.

The widespread perception is that the banks are off scott free on the bad loans they have sold to securitized vehicles. That isn’t exactly true. The banks made legal representations and warranties regarding the loans they sold. If the loans fell short of the contractually agreed upon standards, the seller has to make good in some form, say substitution of good collateral for the bad loan, or monetary damages. But the recoveries, by parties like Freddie, Fannie, AIG, MBIA, and Ambac, are going to come straight out of the bottom lines of banks. As Chris Whalen noted:

The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat one another. The GSE’s are going to tear 50-100bp easy out of the flesh of the banking industry in the form of loan returns on trillions of dollars in exposure, this as charge-offs on the several trillion in residential exposure covered by the GSEs heads north of 5%. The damage here is in the hundreds of billions and lands in particular on the larger zombie banks, especially Bank of America (BAC) and Wells Fargo (WFC).

To put the growing combat in the loan repurchase channel into perspective, keen analysts will already know that a new item has appeared in the disclosure for non-interest income by many larger banks that have been active in the securitization markets. In the case of WFC in Q4 2009, gross income of $1.2 billion in mortgage loan originations was net of $316 million in loss reserves for loan repurchases. Imagine if we add a zero to the loss allocation, then another, and you get to the worst-case exposure on OBS loan repurchases.

MBIA’s latest financial statements (see the disclosure starting p. 53) illustrates how ugly this can get.

It appears that MBIA has requested and received almost 27,000 loan files, mainly from Countrywide relating to pools of second mortgages that MBIA had guaranteed. This is a small sample of the total (over 400,000) and represented 25% of the loans classified seriously delinquent at the time (I understand mid-2007) . Of the 27,000, 24,000 were fraudulent/non-conforming (FICO scores below what was repp’ed and warrantied, homes not primary residences). Those who have been watching the case believe the same percentage would apply to all of the remaining “seriously delinquent” loans, and perhaps even more of the rest of the loans, since those were the earliest vintages and those from later in the cycle were even more suspect. But their access to more files was blocked so they filed the lawsuits, etc. MBIA has already recorded $1.2 billion as “receivable” from this action, and that is based ONLY on those 27,000 loans.

As one reader noted:

The magnitude of the absolute liability of the mortgage originators to the bond insurers and securitization trusts themselves – on second mortgages alone – is, categorically and empirically, well into the tens of billions of dollars. The percentage of abjectly fraudulent second-mortgage loans made by Countrywide, ResCap, IndyMac, JPM, WFC is staggering. When the house of cards begins to come down, it will spread far and wide – to not only the bond insurers and mortgage insurers, but to the trusts themselves. The GSEs are just starting this process on their firsts, but it’s the private sector entities who are moving aggressively in court, but have been (temporarily) stymied by the aforementioned defendants who have thrown up all sorts of legal bs just to prevent even showing the original loan files to the very institutions that insured them on the basis of the originators’ reps and warranties!

Some of this is on MBIA’s website, but I haven’t seen this really written about anywhere, despite (because of?) the impact it would have on the banks’ balance sheets.

This could become very interesting, and not in a good way, either.

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  1. a

    “Now many readers will regard this as a good solution, but they forget that this process of shrinking lending will be painful and is something policy markers are struggling mightily to avoid. ”

    Here’s one reader who regards this as a good solution, but who has forgotten neither that this process will be painful nor that policy markers are struggling mightily to avoid it. Anyone who thinks that the way our of our difficulties doesn’t involve pain – lots of it – is dreaming mighty big dreams.

  2. Richard Kline

    Kicked the can down the road is what was done, by the powers that be in Autuman in New York 08.

    Yves: “The banks made legal representations and warranties regarding the loans they sold. If the loans fell short of the contractually agreed upon standards, the seller has to make good in some form . . . .” I’ve been waiting for this shoe to drop for some time. And it is telling that it is the _outer ring_ parties to all this who are turning to the courts; the GSEs, the re-insurers, and the like. It has been clear that the strategy of the inner ring crumbs of the oligarchy from Autumn 07 on has been for the Guvmint to buy the toxic bonds or other obligations from them at near face, or in Plan A’ to guarantee their present holders against all losses below small first-hit threshhold. “Y’know, like the RTC; cause we’re systemically necessary.” [Except the RTC took the assests of _closed_ concerns but let’s not let the facts confuse the narrative.] So the inner ring crumbs to the subcrime spree have been holding out for the government to step up and take the loss for them, that is the other 99% of the citizenry. If necessary, they are prepared to hold out for years, telling that Beltway coterie to kick the can another ten yards at a time, while paying out to swap weasals and stoats victorious at the elections until some quisling crew can be got into office who will mash a thumbprint on this design, natch.

    Why did the Guvmint kick the can? Panic? The more apt question is, Why is the Guvmint _still_ kicking the can? My view, stated previously in these illustrious pixels, is that Bernanke, Summers, Geither, Emanuel, Rubin, et. al. are delusional. They don’t think we had a crash but a panic. They are convinced that ‘values’ aren’t reflected in current ‘prices,’ and that the latter will bounce back as soon as ‘stability’ returns. And at that point, the Guvmint won’t have to take the toxic waste from the oligarchs because the plutonium will be magically morphed back into gold. Nobody has told these well-placed, egocentric mooks that the ASBs were ALWAYS plutonioum, just with a little gold paint splotched on them by JPM and GS and Merrill or just with straw pasted on by Countrifried and Indyfai and WhoKnu. These sub-geniuses in halls of power didn’t bother to read the instuctions on the Japanese model kit for Bolstering Bailous they’ve assembled upon our amber waves of grain. Those instructions read, “Squeeze hard so that the pieces hold together until the Old Reality Glue sets, time to cure on the order of ten myriads.” I.e. shortly after Hell freezes over first: twenty years and counting and the Japnese Model hasn’t produced any recovery for their real economy.

    Wadda y’all think will happen first?: The Guvmint keep kickin’ the can down the road to Eternity, the Oligarchs elect a better weasel (for them) to shift the load, or the light of day in the courtroom bring the whole evil farce to a contumacious eruction.

    1. Skippy

      I can only hope it’s the later, just for the fact that I’m tired of going to the lobby to get more popcorn when I figured out the who, what and why, but just want to see visual.

      Skippy…Can’t believe you pasted up Afghan article in the links old boy…may I have a crack at it…people that drink their own piss and only their own piss end up crazy sooner or later…they all need a hikeing holiday in the mountains methinks, with some fresh H2O from the streams.

    2. DownSouth


      When you said “These sub-geniuses in halls of power didn’t bother to read the instuctions on the Japanese model kit…” it reminded me of an experience I had back during the heyday of the S&L rip-off.

      An art dealer friend of mine invited me to this high-dollar fund raising dinner in Dallas for Mark White, who was then governor of Texas, Seated at our table was the infamous S&L owner and real estate developer Danny Faulkner and his wife. Meeting him gave a surreal quality to the term “master of the universe,” or as you describe them these “sub-geniuses in the halls of power” who “didn’t bother to read the instructions.” The interesting part about Faulkner was that he literally didn’t know how to read. I think he said he only completed something like the 7th or 8th grade and didn’t go any further because of a learning disorder.

      Eminently likeable and good natured, the garrulous banking and real estate magnate regaled us for two or three hours with outrageous tales of his wheeling and dealings, his fleet of private planes and his private helicopter, how the more educated and erudite members of his world sometimes looked down upon him, and how he leveled the playing field with his closet full of “$3000 Brioni suits.” His wife was just the antithesis of Faulkner, sitting quietly and hardly ever muttering a word.

      I can recall as if it were yesterday that my art dealer friend wanted an after dinner digestif, which Faulkner very quickly responded to, summoning the waiter and graciously asking if anyone else wanted anything, which they didn’t. When the waiter came with my friend’s drink and presented Faulkner with the bill, which was something like $3 or $4, Faulkner handed the waiter a $100 bill and said “keep the change.”

      Faulkner eventually went to prison, a fate obviously not to be suffered by our current crop of “masters of the universe” because of their safe harbor, magnaminously provided by their great protector, Barak Obama.

      1. Siggy

        I remember Danny Faulkner and Don Dixion and a few others who traded in cash for trash. I remember the legislation that enabled S&Ls to make commercial loans. I remember the the tax legislation that invalidated the syndicated tax avoidance scheme that was built on the original legslation. I remember saying this is all a fraud. I remember that it took 4 years for the devaulation of the fraudulent developments to occur. I remember the RTC that so many seem to think did such a marvelous job of resolving the mess. I remember saying that we would have been better served if the RTC had been created as a public for profit investment enterprise. I remember noting that a great many see-thru office building ultimatly began to perform. I remember Don Carter buying thirteen or so for roughly 30 cents on the replacement cost dollar and subsequently selling them them to Richard Rainwater for rougly 65 cents on the replacement cost dollar. Until that transaction I thought Don Carter was just another bowling alley operator.

        The problem was that the real estate itself was not bad, it was the artificially inflated prices attributable to the real estate that was wrong. In the current mess I see that we have CDO’s etc whose purchase makes no sense whatesoever.

        Looking to small business for a recovery in employment is a misstake. One of the important reasons that underlies the recent loss in employment is the fact that a great many of the lost jobs were unneeded in the first place. Moreover as some form of a recovery develops those jobs will never come back.

        As to government stimuless; be very wary of that purported benefit. What the government spends must ultimately be paid for by way of taxation or the further debasement of the currency. The national debt is now overly large and increases to it put us squarely on the road to banana boat serfdom.

        When this episode is over we shall be very much poorer and the wage gap that makes the chimerica labor arbitrage possible shall be too narrow to support that little game.

        Even if you live in Mexico, get ready for poorer.

        1. Anonymous Jones

          “I remember noting that a great many see-thru office buildings ultimately began to perform.”

          I remember this too. I’m not so sanguine about a repeat though. As they say, past results are no guarantee of future performance. I’m not sure many of the high rises today can even continue to cover costs once this 30 year credit bubble finally starts to unwind. Do we really need high rise offices any more? Ten years from now, will we need as many as we have now? I’ve seen a lot of death spiral condos (high HOAs usually precipitate the spiral), and I’m still seeing a lot of office buildings that are for all practical purposes leasing out at $0 cents a foot triple net. Some real estate is bad. Not the land of course, but the structures, and many will have to be wiped away because their costs will outstrip any revenues or uses that could possibly justify them.

        2. DownSouth


          I don’t know where the path out of the wilderness lies, or if one even exists.

          Arguments like those made on billyblog (see today’s “LINKS”) or by Samuel Bowles (see “Born Poor” in yesterday’s links) which talk about “capacity and labour underutilization” and “real resources” certainly blow the Austrian School to smithereens.

          But the recent findings of neurobiologists, psychologists and behavioral economists which I find so captivating would seem to do a similar demolition job on the notion of indiscriminate government largess for the purpose of generating demand. Somewhere along the way the ideas stressed by the behavioral economists—that there has to be some sort of system where reward matches performance, that slackers and free-riders get punished, and that psychopaths not be allowed to engage their destructive behaviors with abandon—get lost.

          But the new multi-disciplinary studies don’t offer any panacea. The traditional models, based on either the assumption that that all human beings are self-regarding (e.g., Thomas Hobbes, John Locke, Adam Smith) or that all human beings are altruistic (e.g., Jean Jacques Rousseau, Karl Marx) have certainly proven to be highly flawed. As Herbert Gintis et al point out in Moral Sentiments and Material Interests: “In fact, people are often neither self-regarding nor altruistic. Strong reciprocators are conditional cooperators (who behave altruistically as long as others are doing so as well) and altruistic punishers (who apply sanctions to those who behave unfairly according to the prevalent norms of cooperation).” But here’s the rub: “it is extremely difficult to build simple and tractable models of strong reciprocity. The problem is that the explicit modeling of intention-based or type-based strong reciprocity quickly renders these models very complex and difficult to handle.”

          So all the new empirical research being done in the fields of neuroscience, biology and psychology does little more, at least thus far, than shed some light on why the old models failed so miserably.

          1. Siggy

            I’ve always felt that the path to an ethical society was paved with incentives that rewarded ethical behaviour. I’ve never believed that there is a simple system of government that solves all problems. I much prefer a republic to a democracy. I’d be even happier if the US lost 100 million souls. My view is that we do no have the water or arable land to support a greater number.

            I’d love to see an increase in manufacturing employment, however Walter Ruether was far to successful in obtaining wages and benefits for the UAW. Notwitstanding Las Vegas, Jimmny Hoffa did nicely for the Teamsters except that because of Las Vegas, those Teamster pensions are not proving to be worth what they were advertised to provide.

            More than a failure of ideolgy we are experiencing a failure of government to enforce the laws that are on the books. There is something very wrong afoot when we read nothing about inquiry and prosecution as to the execution of contracts that could not be honored. It is even more disturbing that the Fed does not want to permit inquiry into its actions with respect to AIG and other financial market activities. While the line is not direct, the Fed does have a great dependency on the Congress for its existence.

            To promote the efficent market hypothesis in the face of clear evidence that market information is seldom Gaussian in its distribution is more than I can comprehend. As a child I had to read Clauswicz in the German. It was also required that I read Aquinas and Spinoza and few other philosphers. At dinner there was the book report to be rendered. Saturdays we had chicken lunches and Dr Hutchins was in attendence and the discussion after the meal was politics and the New Deal.

            I’ve always felt that the ‘Chicago School’ offerred very valuable guidance. I’ve also always felt that there has not yet been developed a universal all encompassing theory of political economy that could be relied upon for guidance in any and all circumstances. The Chicago School and the Austrians and the Keynesians represent a dialogue. each offers an insight. None has an absolute answer.

            I do find some things to be self evident. What the government spend must come from either taxes or the debasement of the currency. The great vulnerability of any and all social theories is that the theory will fail because it is falable people who will be implementing the theory.

            More than anything, it is people who let you down. There is a profound song in the musical Paint Your Wagon, the refrain is: Mud can make you prisoner, the plains can bake you dry, snow can burn your eyes, but only people can make you cry.

        3. angryfutureexpat

          Small businesses will not be the drivers in employment growth for a year or two at least. Small businesses are so debt burdened that even if the mythical customer and client with money were to show up tomorrow, small businesses will be doing little more than digging their way out of the hole they’re in for the next year or two.

          And I see little to suggest that customers and clients with money will be showing up any time soon.

          Get ready for a huge wave or small business bankruptcies or (even more likely) small business owners just throwing in the towel and walking away.

    3. i on the ball patriot


      Moody’s rates the masters,
      FICO rates the slaves,
      Both controlled from above,
      By the ruling elite knaves,

      Credit bubble bombs,
      Soften up the land,
      Derivative bombs,
      Work hand in hand,

      To gain control,
      Of the super bowl masses,
      Who munch Doritos,
      Whilst on their fat asses,

      That deceptive can,
      Getting kicked down the road,
      Was designed by the elite,
      Its a Jap modeled toad,

      It hops on command,
      To keep the marks in the game,
      To enslave and eliminate them,
      Is its ultimate aim …

      Deception is the strongest political force on the planet.

      1. MyLessThanPrimeBeef

        When is Moody’s going to downgrade the Homo Not-So-Sapiens Not-So-Sapiens species to Home Not-At-All-Sapiens Not-At-All-Sapiens?

        Hopefully, they have aliens do the downgrading because self-grading is not credible. Whoever called us Homo Sapiens Sapiens committed the cardinal sin of not having recused himself due to conflict of interest…unless that guy was an alien (and he better had gotten permssion from the UN; otherwise, he was an illegal alien), I suppose.

    4. dlr

      Hmm, yes, the eternal question – were Paulson, Bernanke, Geithner, etc, Stupid, Cowards, or Corrupt.

      I personally vote for corrupt. Stupid is letting them off way too easily.

      And of course, as always, Obama and Bush get a free ride, and receive no criticism for the actions of their appointees. They could have intervened at any time to short circuit this massive transfer of government wealth. There is no possible way that they weren’t in the loop, and didn’t authorize the looting of taxpayer funds for the benefit of their campaign contributors.

  3. Jim the skeptic

    Some banks are in trouble because the always efficient Mr Market is giving a low appraisal to the loans and securities on the banks books. They can’t afford to sell those assets at those prices. They can’t even afford to accept those low prices on their books!

    Some banks are in trouble because they misrepresented some of the loans which they sold.

    Some banks are in trouble because they made loans to borrowers who are in default or will default.

    None of this is our concern, capitalism works if you let it.

    In the 1990s the Japanese refused to force their banks to face reality and American financial wizards shook their heads in disbelief. The underlying problem for the Japanese economy was increased competition from other southeast Asian countries for the American import market. How much worse have they made their problems by coddling their banks?

    Now the FED, FDIC, the Treasury and a host of other American bank regulatory bodies are coddling American banks. How much worse will they make our problems?

    Adults sometimes have to select the best of all the bad alternatives.

    1. i on the ball patriot

      “None of this is our concern, capitalism works if you let it.”

      A bullet to the brain works if you let it! I would be concerned about it.

      “Adults sometimes have to select the best of all the bad alternatives.”

      Adults create their own alternatives. Children let others choose alternatives for them.

      Capitalism does not exist. Its a scam decoy.

      Deception is the strongest political force on the planet.

    2. DownSouth

      Jim the skeptic,

      You assert that “None of this is our concern, capitalism works if you let it.”

      While the truth of your claim is highly questionable, the fact remains that, even if it is true, few today would be willing to suffer the consequences in order to “let capitalism work.” Attitudes, after all, have for most, but certainly not all, people changed over the last 200+ years. For instance, the commoditization of human beings entailed in the “second great law” of capitalism—the Law of Population—as articulated by capitalism’s most renowned early champion, Adam Smith, and as described here by Robert Heilbroner, would be completely unacceptable today:

      To Adam Smith, laborers, like any other commodity, would be produced according to the demand. If wages were high, the number of workpeople would multiply; if wages fell, the numbers of the working class would decrease. Smith put it bluntly: “…the demand for men, like that for any other commodity, necessarily regulates the production of men.”

      Nor is this quite so naïve a conception as it appears at first blush. In Smith’s day infant mortality among the lower classes was shockingly high. “It is not uncommon,” says Smith, “…in the Highlands of Scotland for a mother who has borne twenty children not to have two alive.” In many places in England, half the children died before they were four, and almost everywhere half the children lived only to the age of nine or ten. Malnutrition, evil living conditions, cold, and disease took a horrendous toll among the poorer element. Hence, although higher wages might have affected the birth rate only slightly, they could be expected to have a considerable influence on the number of children who would grow to working age.
      –Robert L. Heilbroner, The Worldly Philosophers

      Capitalism has about as much basis in factual reality as Christianity, and yet is still touted by its adherents as “science,” as something based in nature.

  4. DoctoRx

    I second the comment of “a” (first comment on this post).

    Look, the damage was done. What we’re talking about is musical chairs. There are not enough seats. It’s past time that Citi actually chokes. Its stockholders should lose everything, and its bondholders should take the next hit. If it wipes them out too, well they had their interest payments over the years, so its’s not so terrible.

    The more pain for the banks, the weaker they will be in resisting reform. That is how FDR was able to do some good things in 1933-4.

    1. JTFaraday

      I’m not entirely certain of the best route to take, but I do find puzzling the extent to which some professed skeptics talk themselves into propping up the high priests of an ideology that they believe has no more basis in reality than traditional religion, and at least as oppressive.

      In that light, I find the contention that we ought to apply their own principles to them in order to diminish their influence to at least have some ethical consistency.

  5. Robespierre

    “Now it may be that we have two unattractive choices: making the securitization market “less unsafe” (which seems to be the direction of the OCC ideas, which are getting vastly more MSM attention than the FDIC draft)”

    I don’t think there are two choices. At the end what happens is that the first choice fails it reverts to the second one with taxpayer’s money as a “solution”. The first solution is just a way for bank executives to fill their own pockets.

  6. Robespierre

    Yves: “but there was a reason loans started shifting off balance sheet in the 1980s: securitization was cheaper.”

    And I’m really surprise you actually wrote that. It wasn’t cheaper it just shifted the cost into the future and into the taxpayers.

  7. winterspeak

    Yves: This is a very important point, and I’m surprised you are so ambivalent about it. Maybe your time in Wall Street has resulted in a little more cognitive capture?

    The difference between a good loan and a bad loan is that good loans get paid back. To make banks care whether a loan they make is paid back or not, should it be kept on their balance sheet or should it be sliced up, stamped by some ratings agency, and then securitized out?

    Before securitization ramped up in the mortgage market, so pre-1970s, did the US have any shortage of housing?

  8. Gary


    Thank you for beginning to delve into the murk of securitization that is the focal point of the credit crisis. I see that Norris has done the same this weekend for the NY Times.

    I could point you to a number of blog entries I’ve made over the past 16 months that address the issue. The three-part series on The Transparency Wars (beginning late January 2009) is as good a place to start as any. It begins here:

    Restarting securitization safely is indeed the issue.

    However, where most analyses fail is in not understanding that the fundamental reason securitization froze in 2007 was the realization by the buy side that Wall Street enjoyed a massive advantage in quality and timeliness of data and that advantage led to large losses by the buy side. Articles abound describing this advantage, but pay particular attention to the WSJ Heard on the Street column from November 9, 2007.

    The buy side then did what it usually does. It walked away.

    It has stayed away now for two years, despite all efforts to bribe them into returning (PPIP), making the market look stronger than it is through government purchases, and simply hoping that collective amnesia would set in.

    A December 2008 report by SIFMA in conjunction with ASF, ESF and AuSF dealt with restoring investor confidence to bring investors back to securitization. Included in that report was a study done by McKinsey & Co of the buy side to find out what was needed to get investors to return, albeit at a lower level of participation than previously. The report is quite informative in that it found investors wanted greater loan-level transparency. This is now the focus of the EU Capital Requirements Directive, the ECB and the FDIC. You can read my take on the matter at this link: It is one of the more popular entries by number of hits.

    Yeah, the link has an unfortunate description. Read it anyway.

    Securitization can be restarted safely to diminsh the contraction of global credit, but it will require that we level the playing field as to information and give the buy side more timely information as to the loans underlying the ABS. That information has to be standardized and the data portal has to be administered by an entity that is free from conflicts of interest so that the data can be trusted and disseminated to everyone around the world at the same time. Delivered daily to desktops around the world permits investors to use the analytics of their choice to value and price securities.

    We have tried almost everything else up to now and nothing has worked.

    Transparency, complete and total — that is the solution.

  9. RSDallas

    Great article. Your right, this hasn’t received much press. This is what happens when a defunct market is not allowed to clear in the beginning stages of a correction. I’m no expert, but I would suggest that these banks will end up paying a lot more in the long run for not taking the loss earlier.

  10. Hugh

    All of this pushing sludge and risk from point A to point B doesn’t fix the system. It is a systemic problem and we through our government need to take control of the system to sweep out the crony capitalists, assess the damage, restructure banking and finance, restart responsible lending, write off a lot of the debt, assign and apportion the haircuts, and recapitalize a smaller, more transparent, more vanilla banking sector. It is either this or an uncontrolled reset through collapse and depression. Given the capture and incompetence of our elites, I think the second alternative is the more likely.

  11. drang

    By 2007 specialist forensic research firms were already surfing this awesome tsunami of securitization-related business. That work is mostly done and it looks like the pipeline is all primed. The resulting litigation is going to dwarf all prior class-action windfalls. The administration missed their first chance to kick the bankers when they were down, but they’re going to get another, better chance. It will be like when the liquid metal terminator got blown to smithereens but the little blobs were crawling back together. They’ve got to purge Geithner and Rahm to be ready for that but with banks and bankers pulverized, the government will be building the sector de novo.

  12. Ginger Yellow

    Strictly speaking, the safe harbour isn’t about off balance sheet treatment. It’s about legal isolation, ie whether or not the FDIC will try to seize the securitised assets and/or repudiate the originator’s contractual obligations in an insolvency. It does have some connection with balance sheet treatment, however, since in the past the main criterion for safe harbour eligibility was that the securitisation was accounted for as a true sale (and hence off balance sheet).

  13. aet

    There were slums *& tenements pre-1970, too, IIRC.

    The question is: is there a shortage of affordable housing?
    And as with all things real estate, location is king.
    So in the US asa whole, thee’slots of housing…but it (=affordable housing: there as never ever been a shortage of mansions, has there?) can get very difficult to find in some cities, and in some neighborhoods.

  14. Robespierre

    And why does affordable housing have to be of the ownership kind? Can you conceive a society where owning a home is not a social mandate? I mean the American dream is the result of propaganda from: Home builders, mortgage companies and banks to enrich themselves. I think all tax incentives should be eliminated and let the market dictate what the “American dream” is

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