Prospective Buyers of Toxic Assets Wary of Plan

By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, February 11, 2009

LAS VEGAS, Feb. 10 -- Some of the people who the Obama administration hopes to coax into buying toxic securities from banks reacted today with interest, caution and most of all frustration that more details were not forthcoming.

Hundreds of investors in securitized assets are gathered here this week for an industry conference that has been consumed by conversation about developments in Washington.

In the morning, attendees clumped around televisions to watch Treasury Secretary Timothy F. Geithner describe his program for reviving the banking industry, in part by persuading private investors to partner with the government to buy devalued assets.

The verdict of several watchers: Interesting outline, no substance. And a growing impatience from a broken industry that the government has not yet found the way to help.

"He said all of the right things, things that needed to be said, but there are still some real specifics that have yet to be cemented," said Ralph C. Daloisio, managing director of the structured finance group at Natixis, a French bank, and the new chairman of the American Securitization Forum, which is hosting the convention.

Securitization made possible the rapid expansion of American lending in recent years by allowing investors to bundle loans and sell them, generating fresh funds to lend again. But when the loans in those bundles started to go bad, the global financial system was brought to its knees.

Now it is an industry in hibernation.

Securitization experts say the business of packaging loans for sale to investors will not revive until the marketplace can be cleared of the wreckage of past bundles. That won't happen until home prices stabilize, because mortgage loans make up the bulk of the industry's raw materials, and falling home prices drive down the value of the bundles.

After that, the industry will need to find people willing to buy new securitizations, in part by changing the way they are sold. ASF started working on those rules, including improved disclosure and accountability provisions, at last year's conference in Las Vegas. By summer a draft was complete, in part, said one participant, because industry members now have time to discuss and address long-standing issues.

But the plan remains on hold because the first two problems remain unsolved.

"It's all about D.C. at this point," said Michael Rieger, senior portfolio manager at Seix Advisors, which handles investments for large institutions.

This conference once was a vast marketplace for sellers and buyers of securities, with panel discussions as a gloss on the bazaar. This year, the idled dealmakers listened as lawyers and regulators sorted through the wreckage of their industry. Optimism, where it could be found, usually regarded the year 2010, or perhaps 2011.

In years past, the conference also was a grand collection of parties. Vestiges remained this week. The venue still is the Venetian hotel in Las Vegas, one of the world's great monuments to disposable income. A woman in short-shorts still offered free shoe shines to attendees.

But the mood generally was dour. The annual "Industry Dinner," headlined in 2007 by comedian Jay Leno and last year by Blue Man Group, this year became a "Working Lunch: Policy and Politics," featuring Karl Rove and James Carville, complete with a segment on housing policy.

The attendance of 4,000 was down by about one-third.

Still, there also was confidence that the securitization industry would recover, in part because Washington needs it. There is no other model that can replace its funding for loans to consumers and businesses.

"No one in this room has any illusion that bank balance sheets can pick up the slack from securitization," Matthew Eichner, a senior adviser in the Federal Reserve's division of research and statistics, told the conference.

Regulators also have encouraged the industry's efforts to improve the rules of the marketplace, industry officials and regulators said.

The effort, called Project Restart, lays out detailed, though voluntary, rules for the sale of new securitizations.

Companies would disclose to investors almost 150 separate pieces of information about each loan in each bundle, and then, after the bundle was sold, they would update much of that information on a monthly basis. The information would include everything from the borrower's detailed financial particulars to the name of the software program used to check the appraised value of a home.

The proposed rules also would include increased accountability for sellers of bundles that include bad loans.

The goal, described in a proposal ASF distributed at the conference, is to provide "massive injections of new disclosure and reporting."

Investors said the new effort was welcome and a precondition for the revival of securitization, but they cautioned that it could take years before buyers learn how to interpret the new data, because at first the significance of a particular characteristic would be unclear. Only in time would buyers know that a particular borrower profile was more or less likely to default.

"You can have disclosure of all these fields, but for it to be useful to investors you need history," said Joseph Philips of AIG Investments. "To get securitization back up on its feet, you need rules, and you need time."

Investors said the Federal Reserve's program to help private investors buy securitizations could be useful in this respect by allowing the industry to limit risk as it gained experience with the new data. But they noted that the details of that program also remain unclear.

So the conference ended as it began, with the industry waiting for marching orders from the government.

"Until we solve the issue of the outstanding securitizations," said Tom Deutsch, deputy executive director of ASF, "it doesn't matter what we do."

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