Monday, July 6, 2009

How the dead live...

You thought it was dead but it seems it's having another go-around. Securitisation is back, only this time it's better, smarter, safer... honestly! Barclays Capital are calling it "smart securitisation", Goldmans "Insurance". From what we can see it seems to follow the complicated formula: diversify, improve rating. Apparently this time it's ok though as the instruments are taking existing assets from bank's balance sheets not generating new ones. Well, my friends that's how securitisation started the first time around.

It seems similar moves are afoot in the market for Commercial Real estate Mortgage Backed Securities (CMBS). Here the incentive seems to be from S&P who are to downgrade a load of bonds such that they will no longer qualify for the FED's TALF liquidity facility. Not that anyone went anywhere near it the first time around - the banks need capital not liquidity. Instead the private side is constructing what they are calling "re-Remics". I quote Risk Magazine: "This involves splitting existing CMBS into new tranches with fresh ratings." (Who is buying this stuff?!). Crucially this "might also provide regulatory capital relief for banks and insurance companies". Well they won't be doing otherwise!! Groundhog day anyone? Let's go round again?

Lack of meaningful action by regulaltors is leading to private side innovation to fill the space they are creating, be it Sovereign CDS indices, re-Remics or whatever. The financial press at least this time around can see that this is somewhat peculiar, and understand the instruments better than previously (note the altered the phrasing around "ratings instability"). But on it goes never-the-less. Do we really want another go-around?

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