Academics won’t heal securitization

The FDIC and the Federal Reserve are hosting a little symposium in Arlington these past two days to discuss the future of the housing finance industry in the US.  If you were lucky enough to catch the remarks of Sheila Bair, Chairman of the FDIC, you pretty much got the gist of the general tone at the event.

The panels for the various topics are stocked with academics and government officials, each with a list of mostly vague views of what caused the mortgage crisis and how to fix it.  It is noteworthy to us that such a public examination of potential fixes for the markets did not include any signficant representation from either the mortgage industry or the securitization industry (bankers, issuers or investors) yet each panel felt very comfortable voicing opinions about what these industries need to do to fix their problems.  Maybe it’s us but the lack of participation by these industries in an event like this seems rather telling.

Let’s pick one recurring theme in yesterday’s discussions.  Several panelists indicated that the return of  mortage-backed securitization  will be central to the return to health of the mortgage industry.  Nevertheless, several indicated that the securitization market could not continue to exist in its pre-existing form (i.e. its puts too much risk on the American taxpayer).  There was talk about the need to shore up taxpayer liability, about how issuers would have to undertake a whole series of remedies from enhanced disclosure to assuming more vertical risk.  Investors will have to live without government guarantees and understand safe harbor rules.  Once again maybe it’s us but this “new securitization world” that these experts have dreamt up doesn’t sound like it will be very appealing to either issuers or investors. 

Do these folks get it?  If you tell people that they need to scale a 20 foot wall to buy oranges and once they get over that wall there’s no guarantee that those oranges (that they bought) will be theirs to keep, then I think any logical person might say, people will stop buying oranges; except one at a time and only if that’s all that is available to eat.

To make matters worse, Chairman Bair, in her remarks, offered no comfort to investors that the resolution of investor rights for existing rmbs product will be resolved any time soon.  Can these folks not see the connection between a weak or non-resolution to existing market issues and the debilitating effect on the reemergence of a market for new securitization product?

The best these experts can say is that they are continuing to “discuss” and to “analyze” .  All fine and good.  Just don’t hold your breath waiting for investor enthusiasm to return until some real and “transparent” resolutions for investor rights are in place.

About markferraris
Managing Principal Orchard Street Partners LLC

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