Securitzation industry a sinking ship?
Chances are the loan you got for your car or house in recent years ended up being bought by investors in a process called securitization. Some blame that process for or current economic mess and say it shouldn't be allowed to continue. Bob Moon reports.
Attendees listen to a session at the American Securitization Forum in Las Vegas. (Bob Moon / Marketplace)
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Kai Ryssdal: If you bought a house or a car or got almost any other kind of loan in the past five or 10 years, there's a better than even chance that your debt was passed along like a hot potato. It was probably bundled up with other loans and sold to private investors, as a mortgage-backed security or some other kind of bond. The name for that process of bundling and selling is "securitization." It's gotten a lot of the blame for the mess we find ourselves in. And there's some question about whether it ought to be allowed to continue. Our senior business correspondent Bob Moon reports.
BOB MOON: The idea seemed watertight. But it's not the first time that trying to "compartmentalize" risk -- to keep it contained -- hasn't worked the way it was supposed to.
TITANIC SCENE: She can stay afloat with the first four compartments breached, but not five -- not five! The water will spill over the tops of the bulkheads, from one to the next, back and back. There's no stopping it!
There are remarkable parallels between that scene from Titanic and the disaster that struck securitization.
Packages of mortgages and other "securities" were sold to investors as an essentially unsinkable way to make steady returns. Since they were made up of a mix of loans, that was supposed to offset the risk from any that failed. The remaining good loans were supposed to keep the "security" -- or bond -- afloat, and paying off.
Maybe investors were too confused by the complexity to understand what they were getting into, or they just never imagined an economic iceberg might sink the whole thing.
TITANIC SCENE: But this ship can't sink!
TITANIC SCENE: I assure you, she can, and she will. It is a mathematical certainty.
Think of it this way: It wasn't just subprime mortgages that went under. The economic spillover help pulled down other loans, even many of the supposedly higher-quality ones that investors were led to believe were ironclad.
Now, they've abandoned ship. And since investors have stopped buying these bundled loans, banks have less money to turn around and lend around the world. But there are already plans to salvage the S.S. Securitization -- raise it from the bottom of the stormy credit sea, patch it up, and set sail.
RALPH DALOISIO: There will come a time, there will come a day, when our industry will once again deliver the type of financial efficiencies on which modern society depends.
As I listened to chairman Ralph Daloisio deliver that lofty vow in Las Vegas recently to his group, the American Securitization Forum, there was an obvious question: How does the industry ever hope to win back the trust of investors who now see this business as far too risky and impossibly complicated.
Tom Deutsch has been at the forefront of the group's "Project Restart." He says the focus is on providing investors with a lot more information on what's inside the loan packages they're buying, so they can clearly understand the quality of those loans.
TOM DEUTSCH: I think there was a whole lot of trusting, in the former market, of both the originators of the loans, as well as a little too much trust that was put into the credit-rating agencies. And institutional investors clearly have a mandate now that they have to do more of their own due diligence on these loans.
Big-money investors need to see hard proof, he says, before they'll start buying again. And until they do and credit loosens up, he says borrowing money will cost more, and fewer consumers will be able to get car loans, credit cards and mortgages.
DEUTSCH: If securitization doesn't come back, American credit will look nothing like it has looked over the past 20 years, which is I think simply unsustainable.
ROBERT KUTTNER: It's a self-serving myth. If you talk to the industry that benefits from this, that's the story you're going to get.
That's Robert Kuttner, a senior fellow at the progressive think tank Demos. He argues that Americans had no trouble finding credit before the invention of what he calls these complicated schemes -- and housing, car sales and other businesses thrived without them, for decades. All the idea did ultimately, he complains, is make the rich even richer.
KUTTNER: The demand for these products was created. It was not as if there were people out there saying, "Please give us bonds based on mortgages that are sliced and diced into degree of risk and yield." The securitization gang took a fee at every step of the way. It was in their self-interest financially to make it as complicated as possible, and these are the last people in the world who have any credibility if they are now posing as reformers.
Kuttner says if anything, securitization created too much easy credit. But even now, the industry's Tom Deutsch sees a place for certain kinds of the riskier loans that critics blame for triggering the economic mess.
DEUTSCH: Subprime loans are very good for the American economy. Those with impaired credit that have, say, lost a job and had to miss a few of their payments on their home, but then want to refinance. Should that borrower not be able to get credit because they have a low credit score? Those are very good targeted borrowers.
That worries Robert Kuttner, who says it shows the need for what he calls radical simplification and heavy regulation of this industry. If we don't learn from past mistakes, he warns, we could find ourselves right back in the same -- well, you get the picture.
TITANIC SCENE: Iceberg, right ahead!
I'm Bob Moon for Marketplace.
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From CA, 03/19/2009
As we speak, these clowns along with anyone else involved in the financial and mortgage industry are desperately trying to get the whole housing inflation machine going again. The FED and US government needs to realize that Securitzation is unhealthy for the general US economy and needs to be abolished entirely.
From Seattle, WA, 03/18/2009
Securitization has broken capitalism. In a free market, the price of a thing is determined by the interaction of a willing buyer and a willing seller. When the thing you are selling is debt, the willingness of the seller (creditor) is necessarily informed by the risk of loss associated with the transaction. That risk is a critical element necessary to the seller to acurrately assess his/her self-interest, which in turn helps the seller determine if he is willing or unwilling to make that loan at that rate of return.
Without risk, the computaion of value on behalf of the creditor/seller is skewed, resulting in a credit market that is supported by the fantasy of low-risk and is, as we've seen, dreadfully in danger of collapse when the true nature of the risk becomes clear.
Securitizaton leads to artificially inflated values in all sectors of society -- from automotive manufacturing to education to housing -- because debt buyers can find artificially low cost credit to cover the increase in cost, making themselves willing buyers at a much higher level than they would be otherwise.
We need to ban securitization and get busy with the very difficult work of resetting this economy so that things cost what they are worth to buyers in the marketplace, not what they are worth to buyers with access to free credit on the market. This will, by the way, suck for everyone, thanks to securitization.
From winston-salem, NC, 03/18/2009
The lesson here is that saying, or legislating, "transparency" does not make it real.
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