Finance industry laments new curbs on securitization

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, February 8, 2011; 6:14 PM

ORLANDO - On the surface, it seemed as though the party was back on for the financial architects of Wall Street.

In a cavernous ballroom here Sunday evening, they gathered to watch the Super Bowl, frequenting six bars and enjoying sirloin-steak burgers and three types of wings.

And then during the day, they sat in panels and traversed a vast exhibit hall, where a variety of financial firms had set up shop, one offering complimentary shoe shines, another giving away massages, and a third greeting visitors with a $5,000 sand sculpture.

But beyond the pomp, it was clear at the annual conference of the American Securitization Forum that times aren't what they used to be for this crew of lawyers, traders, bankers, analysts and programmers.

The financial crisis and burst of regulations that followed have dramatically curtailed the role of financial engineering, limiting what once was one of the most lucrative and innovative fields in finance.

For nearly two decades before the financial crisis erupted in 2007, the securitization market allowed Wall Street to manufacture all manner of financial products. The most basic of these were bundles of home, auto and credit card loans that were turned into single investments that firms and countries worldwide could buy.

But then things got more complicated. Wall Street found ways to allow investors to speculate on Hollywood films, patents, lawsuits, airplane sales, and fast food revenues. The most infamous financial engineering, of course, involved the creation of seemingly high-quality investments that were in fact backed by high-risk home loans, extended to people with weak finances.

These subprime mortgage-backed securities helped doom the financial system starting in 2007, and the securitization market has been working to make its way back ever since. Although it has had some success, particularly in auto and student loans, participants at the ASF conference here said that that they expect financial engineering to play a far smaller role in the markets for years to come.

"Banks will be utilizing securitization less in the future than they have in the past," said Bianca Russo, managing director at J.P. Morgan Chase.

In total, there was $145.3 billion in securitizations in 2010, compared with $875.5 billion in 2005, and far below the number even a decade ago, according to industry newsletter Asset-Backed Alert.

During the crisis, the federal government unveiled numerous programs to support securitization, but the longer-term decline of this market has not fazed officials.

"Treasury is less concerned with securitization," said Michael Speaker, a Treasury Department lawyer. "What Treasury is concerned about . . . is the ultimate extension of credit to consumers and small businesses."

But Paul Bossidy, chief executive of Clayton Holdings, which analyzes the loans that make up many investments, said that if the market does not recover, consumers and businesses will pay.

"It will get more expensive and harder to qualify for a loan," he said. "The supply of money is not as big as the demand for loans. Banks will be rationing the money they have."

Several factors are reducing the interest in securitization. For starters, before the crisis there was an insatiable global appetite for securities backed by U.S. loans. But today, banks hold trillions of dollars in cash. It's been easier for them to lend that out to credit card holders, for instance, than bundling card receivables into securities and selling them.

Other factors include the still sluggish economy - in which banks are wary of loaning to borrowers who might not pay them back - and the many new regulations facing securitization, including new disclosure rules, requirements that firms retain an interest in securities they sell and changes to the external credit ratings that indicate the quality of a security.

Banker say they are concerned that some of the new rules might have unexpected effects on their businesses. "It would be very wise . . . to institutionalize a process by which there could be changes to regulations that are found to have unintended consequences," said David Moffitt, global head of structured solutions and securitizations at investment bank Morgan Stanley.

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