My friend David Grais has started a blog devoted to structured finance and the law.  David is a very skilled litigator who spent most of his career doing corporate defense work, but has defected from the Dark Side to become a plaintiff lawyer working on a number of very important ABS cases.

David just posted a comment on the his firm’s blog [] that has some interesting insights about the Obama Administration’s plans for “reforming” the securitization markets.  His comment follows below.  — Chris

Proving yet again that it has become a puppet of its sell-side parent SIFMA, the American Securitization Forum has just released a 241-page study that it commissioned from National Economic Research Associates, Inc. (here) to prove that securitization increases the amount and lowers the cost of consumer credit. It is as though the White Star Line commissioned a book on the RMS Titanic in which the author was told to extol the power of Titanic’s engines, the elegance of the china in its dining rooms, and the verve of its dance bands, while strictly ignoring its shortage of lifeboats.

There is only one question worth asking about securitization: why did securitization become the seedbed of the broadest and costliest epidemic of fraud in history? Until we face that question squarely and answer it honestly, securitization will remain in its coma. Unfortunately, the Obama Administration missed a chance to address that question in its plan to regulate the securitization market. (See the post immediately below.) ASF’s sponsorship of the NERA report is more insidious. By a combination of forbidding mathematics and emollient prose (“Recent experience appears to demonstrate readily that securitization is not inherently ‘good’ or ‘bad.’”), ASF tries to whisk us past that looming question and past the one measure that will best restore confidence in securitization: effective redress for investors against those that turned securitization from a useful financial tool into an orgy of misconduct.

ASF’s ill motive and Orwellian methods are evident from its own paper (here), in which it announced the NERA study. ASF says that it commissioned the study in the fall of 2007, when “securitization markets were robust, with continuing growth and strong issuance volumes in major asset classes.” Its motivation, says ASF, was its “assessment that … there was surprisingly little academic or other research that attempted to evaluate and quantify the broader economic impact of securitization in an analytically rigorous way. By selecting NERA … ASF hoped to close this gap in part, and to make a meaningful contribution to the industry and academic literature.”

Does ASF really expect anyone to believe this? In the fall of 2007, securitization was in free fall, as the nearby graph of RMBS issuance in that year shows. And since when was the trade association of the securities industry concerned “to make a meaningful contribution to … academic literature”? And was it a coincidence that ASF commissioned the study from NERA, a subsidiary of Marsh & McLennan known mainly for its work defending suits for securities fraud?

Click to enlarge

The NERA study itself is a prodigious work by two fine economists. But the study inevitably reflects ASF’s instruction to focus on china and music and to ignore lifeboats and icebergs. The study may be right that securitization has lowered the cost and increased the amount of consumer credit. But in subprime and Alt-A mortgages in 2005-2007, securitization did so by obscuring the risks of those mortgages and thereby inducing investors to pay far too much for bonds backed by them. Thus, in its most important arena of RMBS, securitization did not lower the cost of credit; rather, it obscured that cost and then shifted it to investors. The results, of course, were a massive mispricing of risk and misallocation of resources that have shaken the financial system to its core.

If ASF could free itself of the big banks that dominate SIFMA, then it could make a useful contribution to reviving securitization. Until it frees itself, ASF will remain a puppet of the legal and public-relations departments of those banks, as its sponsorship of the NERA study shows.

Category: Finance, Investing, Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Commentary on Securitization: ASF and NERA Rearrange the Deck Chairs”

  1. DeDude says:

    Securitization can be used as an effective tool to spread risk and allow small investors to participate without having to bet on a single asset/borrower. That is how Fannie and Freddy worked before some idiot decided to make them privately owned.

    Securitization can also be used as a tool that allows banks and investment banks to harvest huge fees on huge volumes of business, without having to worry whom they lend to, as long as the borrower can keep afloat for 3-6 months.

    I think you can fix the last part without killing the first, but I have not seen any serious attempt of that from Geithner/Summer. But then you wouldn’t expect them to kill the golden cow that their master and future employer is getting fat from.

  2. VennData says:

    But why does the GOP want to burden business with the current health care “plans?”

    Why don’t they want American’s to compete on a free, open field?

    The GOP simply doesn’t understand what’s happening with China, Europe, our competitors. Give those guys a passport.

  3. Bruce in Tn says:

    Obama’s Mortgage Refinancing Program May Be Expanded (Update1)

    “We’re actively considering how to structure a program that makes sense over 105 percent,” Federal Housing Finance Agency Director James Lockhart said yesterday. He said a ratio of 125 percent “is a number” that’s on the table, though “not necessarily the number we’re going to end up with.”

    ….This is crazy as hell….

    Bruce in Tennessee

  4. Bruce in Tn says:

    I guess I was just too dumb to understand what Keynes meant.

    Investment banks bankrupt? Keep them alive with tax money..

    Bought a house with money you didn’t have, or took all of the value out of it with second and third mortgages? Obama is going for round 2 above.

    Overseas car companies making cars people want and our car companies making huge mistakes? Don’t worry, how about 50 billion in bailout so far, and 5000 dollars for your old clunker, courtesy of the taxpayer.

    State, sales, county, city taxes going to eat you alive this year? Don’t worry, our tax hikes won’t come in until next year.

    Indebted for generations? YES, but since I’m clueless, maybe I’ll be re-elected…

    H G Wells couldn’t make this story up. This is going to end very very poorly…

  5. Bruce in Tn says:,CBST,POT,MOS,%5EIXIC

    How One Growth Fund Manager Has Made 20% This Year

    ….This is the financial media…the fund auerx started in 2008 at 10 bucks….finished today at 5.36….

    heh, heh, heh….they only have to double and they will make your money back if you held them since last year….

  6. Onlooker from Troy says:


    125 refis, maddening as hell isn’t it? We’re going to continue this madness into a sinking RE market. What’s next 150? Undoubtedly, as there is apparently no limit to the madness.

  7. call me ahab says:


    as i said before- better to walk away- why refinance and stay in an upside down home that won’t experience appreciation for some time- and more than likely will lose additional value the longer you sit in it-

    just walk away

  8. Onlooker from Troy says:

    Here’s a beauty for you Bruce:

    Who’s going to buy this money pit?

  9. [...] again, because it is one of the great sources – with Barry Ritholtz’s Big Picture, who hosts a post from ABS Investor Advocate. You’ll find quite a few other good posts [...]

  10. Gary Greenberg says:

    Chris, it’s nice to see your comments on securitization. I’ve been following them since January 2008.

    The point about ASF is that it purports to represent the buy side investors who are on strike over the issue of transparency, but whether in fact the organization has been able to serve two masters with conflicting goals is a question being asked by regulators (first in the EU and now here). The EU amendments to the Capital Requirements Directive indicates that the buy side is beginning to find its own voice.

    Restoring confidence in securitization is crucial and the method by which to do so is not shrouded in mystery. Review pages 39-41 at this link:

    Or if you wish, you can read a summary on my blog:

    Simply stated, the buyer’s strike will not end until investors are given more timely (probably real time) data, standardized and delivered to their desktops next day so that they can use their own analytics to value and price the securities. The desire for collective amnesia to permeate the buy side and cause them to return without obtaining meaningful transparency is a pipe dream. Consider for a moment two of the many reasons: first, the PWG report and the EU speech by Charlie McCreevy made it clear that the buy side did not have the data to perform adequate due diligence (and neither did the NRSRO industry according to Moody’s 9/25/07 report regarding the inability to make timely adjustments to cedit quality); and second, the Wall Street Journal Heard on the Street column of November 9, 2007 continues to needle the buy side as an example of asymmetrical information in securitization.