Debt-Securitization Markets Remain “Paralyzed”
“Given the imperative for securitization markets to fuel bank lending, we won’t have meaningful economic growth until securitization markets are re-established.”
–Joseph R. Mason, a professor of banking at Louisiana State University.
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It may be hard to get a loan — but don’t blame banks, says the NYT. Frozen debt-securitization markets are to blame:
“The continued disarray in debt-securitization markets, which in recent years were the source of roughly 60 percent of all credit in the United States, is making loans scarce and threatening to slow the economic recovery. Many of these markets are operating only because the government is propping them up . . .
The debt-securitization markets finance corporate loans, home mortgages, student loans and more. In good times, they enabled banks to package their loans into securities and resell them to investors. That process, known as securitization, freed banks to lend even more money.
Many investors have lost trust in securitization after losing huge sums on packages of subprime mortgages that had high default rates. The government has since spent more than $1 trillion trying to restore the markets, with mixed success . . .”
That’s a rather intriguing analysis. I wonder how prepared we are for when these markets start up a gain:
“Meanwhile, the programs the government has started have not changed securitization practices that many investors say were a cause of the financial crisis. Lawmakers remain concerned that when securitization comes back, it does so in a way that doesn’t put the financial system at risk.”
Worth the read . . .
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Source:
Paralysis in the Debt Markets Is Deepening the Credit Drought
JENNY ANDERSON
NYT, October 6, 2009
http://www.nytimes.com/2009/10/07/business/economy/07shadow.html
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October 6th, 2009 at 10:00 pm
Ahhh Joseph R. Mason, professor of banking at esteemed LSU it’s rather elementary my good man….there would be no debt-securitization problems if they listened to Joseph Stiglitz suggestion last Feb that the Government should allow every distressed bank to go bankrupt. Then set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice.
October 6th, 2009 at 10:20 pm
There is nothing wrong with the concept of turning pools of debt into securities. The problem came from poor regulation and enforcement and the conflicts of interests in the ratings agencies – along with bad assumptive premises used for computer models.
But now it has turned into a game of “Who do you trust?”.
October 6th, 2009 at 10:21 pm
@Winston: That’s easy. Nobody.
October 6th, 2009 at 10:38 pm
One thing you can say about that LSU finance department; they have a great football program. Let us rethink that statement, shall we?
“Given the imperative for investors to generate positive risk-adjusted returns, we won’t re-establish securitization markets until we have meaningful economic growth.”
October 6th, 2009 at 11:04 pm
So let’s try to summarize. There was this great little scheme that packaged all of this debt into bundles (tranche’ or something like that.). All kinds of stinking dung was bundled together, given a grade A label (for a price Moody’s, S and P etc would label anything as Grade A) and sold to many unsuspecting soles in this country and around the world (China, Europe, endowments, pension funds etc). Credit flowed freely, people bought the debt even though it was miss labeled as grade A (after all it paid a rather handsome interest rate). In reality it was just a mixture of horse manure and fat and nitro aka a weapon of mass horse shit. This allowed people to buy houses they couldn’t afford and would never be able to afford. It allowed businesses you know the fancy golf courses and millions of square feet of retail space no body needed and a drug store on every corner to be built. Office space no problem, we can build millions of square feet, along with apartments etc etc etc. Now to get the economy moving again we need to find some more suckers to buy this repackaged crap. Sounds like a plan to me.
Is my summary close to being reflective of reality or am I just jaded? Help a brother out here.
PS: Didn’t the Chinese at one time buy/own boat loads of repackaged stuff. Then they went almost entirely to buying treasury debt and got rid of the repackaged crapola. (I could be wrong on this, but I do recall reading this).
October 6th, 2009 at 11:26 pm
farmera,
your synopsis should be ‘close enough for Government work’ — prob. is, that if it was, it would wind up indicting them, too.
I’ll hazard a guess: nowhere in dear Jenny’s piece does iterate that ~”the ‘securitization market’ is broken b/c the ‘banks’, themselves, abused it to a state of disrepair”.
only in the NYT does one find: “All the News that’s Fit to Print.” — Bully, for them..
October 6th, 2009 at 11:32 pm
How did we ever get by before debt securitization?
October 6th, 2009 at 11:35 pm
@famera1:
Like your summary…but no summary is complete without assigning massive blame to the Federal Reserve bank for creating the loose credit, moral hazard and total abrogation of bank regulation to make it all possible.
October 6th, 2009 at 11:35 pm
And “the plan” is to start it up all over again. What could go wrong?
October 6th, 2009 at 11:41 pm
That’s true, but I hope if there is one thing to be learned from this massive recession, it is that we have lost our ability to save and live within our means. We need to go back to working hard, saving, and investing in sound ventures instead of looking for an easy way to make money and retire.
http://www.basinpipes.com
October 6th, 2009 at 11:42 pm
I watched lots of investors that could barely distinguish a debenture from a debutante buy tranches of MBS, CDOs, CLOs, etc. with “analysis” consisting of selecting the highest yielding securities that hit their rating target. If you can’t trust the ratings agencies, then you are forced to think (or at least work) to come up with a valuation analysis. That kills a large percentage of the former demand.
October 6th, 2009 at 11:43 pm
constantnormal Says:
“How did we ever get by before debt securitization?”
___________
Exactly. We don’t really need any of this bullshit.
October 6th, 2009 at 11:44 pm
@ZenRazor: Good point but I would submit to you that a simple loss of trust is the biggest reason. That’s not likely to change any time soon.
October 6th, 2009 at 11:44 pm
@ZenRazor: Good point but I would submit to you that a simple loss of trust is the biggest reason. That’s not likely to change any time soon.
October 6th, 2009 at 11:45 pm
@constant: We lived in smaller houses, had few cars, and toys? Didn’t shop for as much useless junk?
October 6th, 2009 at 11:47 pm
When the Banks are sitting on over 1 Trillion in cash? The real story is one of the lack of velocity as the Banks use the curve to re-build balance sheets.
Oh, and of course the bonuses. After all, it takes a true genius to borrow money at zero and sit on Treasuries doesn’t it?
October 6th, 2009 at 11:51 pm
But does it matter if every country is doing its own version of “extend & pretend”? Maybe we’ll be the least bad of a rotten bunch? This Mish post really caught my eye. Gets curiouser and curiouser.
http://globaleconomicanalysis.blogspot.com/2009/10/japanese-moratorium-will-postpone.html
October 6th, 2009 at 11:52 pm
@Winston 10:20 pm
“There is nothing wrong with the concept of turning pools of debt into securities”
Doesn’t it depend on the motive for doing so? The intent, as it were? It seems to me the only reason that debt was securitized was in order to degrade the product being sold by cutting it with crap debt that was known to be bad and expected to fail. It was designed to last long enough to get far enough away from the manufacturers that no one would hold them accountable.
Myself, I call that fraud. and I can think of no valid rationale for securitization of debt, other than to inflate the supply and make more profit, similar to nine decimal places to the drug dealer cutting heroin with rat poison in order to have more product to sell.
The only possible legitimate explanation for debt securitization would be if the debt being securitized was too large to be sold in individual units, so a $500,000 mortgage could be carved up into 10,000 “shares” and sold for $50 per shr. Or a $5M mortgage on an office building securitized into 100,000 shrs. I suppose that might be a legitimate way to securitize, but I see no one attempting to do that.
If someone can explain to me a legitimate case for debt securitization as is currently practiced, I’m all ears.
But I really think that all the debt securitizers should be prosecuted, or at a minimum be subjected to a class action suit for damages resulting from their “products”.
If we’re too timid for that, freezing the debt-securitization markets will have to do.
October 6th, 2009 at 11:55 pm
I agree, constant. The only honest word for it is “fraud”. Plain and simple. That was the only way these criminals could make off with the kind of “returns” (stolen money) that they did – - it was plain and simply fraud. What the Obama administration has done is implicitly support fraudulent activity in this country as a means to making money. We should not be surprised when we see other egregious examples of mass fraud in the near future. After all, nobody who is “somebody” is every punished for it, so why not try it?
October 7th, 2009 at 12:01 am
We can’t have this both ways…deleverage, yet turn on the securitization machine without having checks and balances in place to ensure that what we are securitizing isn’t shit? The is nothing wrong with securitization per se, but unless we know the quality of the stuff being put in it, how you supposed to sell the sausage??
Anyhow, if there were “good” lending opportunities out there, would banks clamber for them as the ROA is so high right now? The banks need to restock their supply of good loans on the books before they worry about securitization. Securitization is a problem that really isn’t, because there is not need for it right now… We’ve got banks sitting on CASH…not even loans…if they were chock-full-o-loans and needed to convert that back into cash to lend, then securitization makes perfect sense. But they aren’t, and they don’t, so they won’t…
Nice article about nothing…now let’s find an article about finding some buyers of all these excess houses….
October 7th, 2009 at 12:08 am
Oh, bottom line–securitization is a dead parrot because it is all about putting risk off on someone else. The market wants to see these chefs (banks) eat their own cooking for a while before eating it again. If the banks don’t trust their own cooking (read internal checks/balances for loan quality), why the hell should we eat it?! AND evidently the kitchen is closed because the number of new loans has declined 5 months in a row. On top of that consumer debt has consistantly declined. As C Whalen said earlier today, this means that the banks are actually shrinking b/c they have less money out there working.
Got a long time to go before securitization issues “hold us back”
October 7th, 2009 at 12:11 am
@JasRas: I can attest from recent experience that the banks (the immortal 19) are not lending right now. I have a perfect credit score and carry only a mortgage right now too. No credit card debt and the one remaining car payment paid off in January. They ARE sitting on the cash girding for future losses and/or trading it pumping the market. I’m convinced of it.
October 7th, 2009 at 12:16 am
@ Mannwich
Good to see you in the Ritholtz dorms instead of your Sigma Nu blog, Mr. Clubby Elitist Trader. You must be up partying from that Twins victory tonight. With the Vikes winning that great game last night, it must be heady days in the Twin Cities. And I was pulling for you against ahab, if only because your winning would leapfrog me into fourth place, as if it mattered at this point, or ever.
The trade for Hightower was a key piece in the puzzle for The Great CNBC Sucks. Warner can’t tell Hightower from Fitzgerald (it’s the dreadlocks), so now I can finally get the points that was intended for my wideout. Assuming people do the logical (I am looking at you squarely, ahab), I hopefully should not have to trade again, and therefore not be compelled to leave my resting place in Lurkerville the rest of the season.
Please refer ALL complaints to Bergsten.
October 7th, 2009 at 12:19 am
The theory of securitization—diversification, liquidity and knowing risk transfer—offers entirely legitimate and desirable goals. The practice during the most recent past was often tantamount to fraud, or actually fraudulent. A decade ago I was fairly certain that the benefits outweighed the risks buried in the complexity of these securities. Today I’m skeptical that these markets can be fixed without a different framework that facilitates greater transparency and ease of analysis. But in the absence of securitization in the old form or a new form, credit is going to get increasingly scarce and the process will not be pleasant.
October 7th, 2009 at 12:46 am
farmera1:
“…..a mixture of horse manure and fat and nitro aka a weapon of mass horse shit.”
The eloquence and profoundness of your description compares to (the late) Hunter S. Thompson’s best.
October 7th, 2009 at 1:11 am
We don’t need securitization. We just need the Fed money spigot running full blast. Money printing will solve all our problems.
October 7th, 2009 at 2:36 am
This is the financial armageddon that our prescient congress warned us of .. The idea that large money centers are now unable to pawn off pan-seared filet of crap to unsuspecting buyers should stike fear into Americans. The horrors that our children would live without their God given right to CDOs??? UnAmerican, I say!!
But Seriously, instead of relying on Moody’s for trading insight, did any of these geniuses that bought this junk ever visit a loan origination company? That might of helped…..
Customer has tapped out – like the previous caller says- these banks gotta eat their own cookin for a while. I doubt even cheap Fed sponsored carry trades can boost the balance sheets enough to offsets writedowns. Expect future rule changes from da Fed. These guys simply will not be allowed to fail. At our expense. startin to get interesting….
October 7th, 2009 at 2:56 am
this is the sentence that immediately came to my mind after reading the thread top
(while waiting for the comments to open)
all I want from this system is a 50K a year income opportunity (100K would be nicer)
but I am of the mindset I need to create it myself (because .. because)
then I’m of the mindset .. what doesn’t exist already (that I can pull off)
I think that is TBP (too)
….
R&D with a WTF attitude?
October 7th, 2009 at 3:07 am
blogger – “When the Banks are sitting on over 1 Trillion in cash?” .. either they have no coalescence either OR the plan is repossession is the plan
October 7th, 2009 at 4:47 am
I learned yesterday from watching CNBC around 4PM anchored by Me-chelle, while moderating Harvey Pitt, that what we are now experiencing was not caused by greedy banks, an inept SEC or rating agencies not even pretending to do their jobs. No, no, no…..the problem was caused by a “lazy” investor class not doing their research before buying this garbage!!
I could not believe my ears. That just goes to prove that those idiots can get away with saying anything with no one shred of truth.
So, their theory is….if you will get off your lazy butt and do your research before making your investment, the securitization problem will be solved itself!
So, let me see if I have this…..If you polish the outside of the apple long enough and hard enough, its core will be fine guaranteed because you polished and rubbed on its shiny exterior.
I turned the TV off. Yes they do suck!!
October 7th, 2009 at 5:55 am
Syndication is built on trust. Without syndication all risk must be paired off perfectly. The wheels of our economy wouldn’t come off, but they would be square rather than round and the deleveraging would be devastating. One obvious fix is to to run all syndicated debt through the EQUIVALENT of two ethically unchallenged (1 yr commitment, like editor of law review) teams at rotating top ten MBA schools, say MIT-Sloan and Wharton
and the essential trust necessary to escape the current self-inflicted credit disease could begin to be re- established. In the meanwhile all the hand-wringing will allow the biggest players (too big to lose, GS, jpmChase, China, Japan,etc) annointed by Tim Geithner, who cares so much about the S.I. ferry commuters as I read in VF) to disintermediate their toxic garbage to the waiting arms of the too-TV’d-up to-notice US taxpayers and their future generations.
October 7th, 2009 at 6:32 am
Frozen credit markets speak to a billion-dollar bailout that still hasn’t served its purpose. The Great Workout still awaits us all.
October 7th, 2009 at 7:44 am
Doesn’t it say something about the quality of business opportunities or borrowers out there?
If they can’t securitize, they won’t put it on their books… hmmmm!
October 7th, 2009 at 7:52 am
We need to go back to working hard, saving, and investing in sound ventures instead of looking for an easy way to make money and retire
———
But isn’t everyone supposed to be a capitalist? Invest to secure their own retirement?
There’s a huge hole in this ideology. It’s that if the entire population invests in equities and gets a share of the profits, then you’ve got sociali*m.
Capitalism is based on someone at the top of the pyramid making big bucks. All Americans are expected to be capitalists and in turn expect everyone else to make them big bucks. Another “hmmmm” moment.
Capitlaims works well when your country is in growth mode (1800s-1950s) and when you’ve got other countries to exploit (1960s-2009). After that, you get the European system (which is still based on the exploitation of develpoing countries).
October 7th, 2009 at 8:03 am
We need to go back to working hard, saving, and investing in sound ventures instead of looking for an easy way to make money and retire
———
It’s a concept that works well at the individual level but not necessarily at the country level.
When an economy has matured, it has matured. Some individuals can make a difference but from a top-down it’s a different story.
You know you’ve got some strange phenomenon when your economy is growing at a real growth rate of around 3% (maybe 6% nominal), yet your stock market keeps on averaging 10-12%. Either the companies in that market are the best or they are simply overvalued. And simply looking at the earnings growth of the last 2 decades as well as the M&A results, I am convinced that the stock market valuation is a farce.
October 7th, 2009 at 8:08 am
A home equity credit loan isnt always used on things like SUV’s or fancy cars. Someone might use equity to pay for college tuition therefore bypassing the higher interest rates that will come with a private lender. You just have to be smart on how you spend the money. Home equity loans are not always bad news.
October 7th, 2009 at 8:52 am
ToNYC posts “….to the waiting arms of the too-TV’d-up to-notice US taxpayers and their future generations”.. or something …….. Yesterday I’m buying 2x20lb dogfood at a big box (in my bazookas) .. two ladies in front of me buying out the “Bears” scrubs .. 20yo clerk got thru a couple on the scanner then nadda (not on record) try another try another .. call management .. boss takes over .. I point out the garments have 2 tags of barcodes .. problem fixed .. ladies say something like “your smart” I reply “no just observant” .. the bill gets settled but there is 1 extra scrub on the bill .. clerk again is attempting to unscan and settle .. looks up fazed .. I reach over and grab the tags “look there is 2 barcodes” .. gets fixed .. my turn after 10min .. clerk checks me out without a PEEP .. as I walk to the end of the belt “not a word to me”"after all that”"I’m worried for America” .. 2 belts down “hey leave her alone” “hey you got no idea what just happened”"oh my G there gonna go at it” .. bosses face 25 feet away is grimace’g .. “I’m not gotta start a fight”"report him to management”"go ahead”"just stay out of here in the future”
end of story
moral of that story .. I guess .. wasn’t my job .. I’m p(ray)ing the girl is otherwise stabble .. for both our sakes
October 7th, 2009 at 9:00 am
the re-re-re-re-remake of “Return of Zombies” couldn’t be more current in my 51yo eyes
October 7th, 2009 at 9:52 am
Banks are still carrying WAY more excess reserves than usual, so you can not blame the entire demise of money velocity on the lack of securitization.
The banks must know something.
October 7th, 2009 at 10:11 am
Paralyzed? This is accurate in the same way a deceased person is paralyzed.
Debt securitization is fancy way to add layers to the process and generate fees that add to the cost of the loan / reduce the profits from the loan.
It added value to Wall Street to generate fees as the loan volumes went sky high… Also allowed the bubble to blow bigger because far flung people/corporations/governments could easily buy them. Then it added value to Wall Street so they could move garbage off the books since they got the credit rating agencies in on it and made it all AAA.
Now responsible / smart consumers/corporations/governments are in control… Those with income AND cost structures that have positive cash flow after 2 years of pain. A VERY rare and powerful group of folks that gets smaller/more powerful every day.
So if you can provide a compelling answer to this question, then I’ll agree that securitization will come back before the next depression (currently scheduled for 2090 on my calendar)
What exact benefits does securitization provide the consumer/corporation/government with income and a cost structure that has positive cash flow?
Are these folks having problems getting loans? Seems to me they don’t need loans.. they are MAKING THEM and why would any of these folks (who are smart) want to cut into their profits by securitizing?
October 7th, 2009 at 11:53 am
“That’s a rather intriguing analysis. I wonder how prepared we are for when these markets start up a gain”
You can ask a different question: I wonder how prepared we are for a situation where this market never picks up again?
The stock market is betting on the this “shadow banking” system to be revived “someday.” What happens if someday never comes?
October 7th, 2009 at 3:48 pm
It’s not going to improve until something is done about the rating agencies. Fool me once shame on you, fool me twice …aa-buh-hehe..I wont get fooled again. The reason all that paper could be sold was that investors had a firm believe that if a paper was rated AAA it was worth something. Furthermore, a lot of them would also secure themselves and get insurance on the paper in case it defaulted. As it looked at that time, there was no risk at all and, therefore, no need to actually look into the content of those papers and evaluate it (something most of them didn’t have a clue of how to do anyway)
Now nobody trusts that the ratings mean anything, and at least 90% of the previous investors don’t have a clue on how to make their own (reliable) ratings of a paper offered to them. Furthermore, getting insurance against the default of a paper is either way to expensive or not possible at all. So you really have to dangle a huge spread in front of them before they are willing to drop treasuries and get some of that private debt paper instead.
We can either wait a decade or two until everybody have forgotten what happened, or get some real reform passed. I have previously suggested that the rating agencies should be forced to have some of their own skin in the game and be required to provide full or partial insurance on the paper at a price that correspond to the rating they give it. Until that happens, I would not trust anything they say to be better than the flip of a coin.