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Wednesday, September 17, 2008


killing securitization

calculated risk has the rundown of this morning's housing data releases -- all bad and looking to worsen. we've clearly got further to run.

paul jackson at housing wire has something else to offer -- FASB rule changes that could dramatically affect mortgage securitization.

In a press statement Tuesday, the FASB announced the release of three exposure drafts that would amend the accounting and related disclosures for transfers of assets including securitizations, and consolidation of certain off-balance sheet entities — what one market participant has called the “securitization killer.”

In particular, the proposed changes seek to amend two key accounting standards critical to modern securitization: FAS 140, which establishes the concept of a qualifying special-purpose entity, commonly called the Q; and FIN 46(R), which currently provides an exception for QSPEs. Both proposed changes would effectively kill the mechanism for off-balance sheet securitization.

Analysts have suggested that as much as $5 trillion would need to come back on the balance sheets of various financial institutions as a result of the proposed changes, tentatively “effective at the beginning of each reporting entity’s first fiscal year that begins after November 15, 2009,” according to the FASB’s statement. Which would force massive core capital needs at a time when liquidity is, at best, an endangered species; at the very least, regulatory capital ratios would come under severe stress.

how powerful would the changes be?

A key HW source suggested that FASB’s proposal provided the smoking gun for the Fannie/Freddie conservatorship, despite no imminent threat of failure at either GSE.

“This may be the gun that put the bullet into FNM/FRE, but at this point, focus is going to be marginal at best,” said the source, an ABS/MBS analyst that asked her name not be used. “Presuming regulated financial institutions would have to increase capital, in current markets the outcome of that exercise is dubious.

the GSEs faced a financing problem on the liability side that forced them into the arms of treasury -- but this is nevertheless testament to the scale of the change represented here.

as a owner-cum-renter who will be looking to buy a house one day in the aftermath of all this, i'm particularly sensitive to the changes afoot in mortgage finance. this looks to me to be another step in the direction of covered bonds as the united states transitions to a different model of mortgage finance. it won't help in the near-term (expect possibly in the predatory regard london banker pointed out) -- the european covered bond market has been effectively shuttered since the early stages of this crisis. but the long-term move seems very possible at this stage, at least for so long as "market solutions" continue to be the dominant mythology of policymaking.

how long will that be? maybe shorter than we think; already public disillusionment is rising. earlier this year james galbraith wrote a tremendous polemic on the narrow and very real limitations of market economics and the perversion of its associated ubiquitous larry-kudlowesque ideology into an enabling myth that covers for mere predation. this view is gaining a hearing in the aftermath of the credit bust. paul jackson mentions toward the end of this piece on the AIG bailout:

Sentiment among HW’s key sources in the market was mixed; most recognized the threat AIG posed, but others lamented what one source characterized as “strong and credible proof” that markets clearly are not as free as most believe.

“The people who declined to regulate commodities, derivatives, lending to people with no ability to pay, short selling, and commodities speculation are pretty much the same people,” said one source, an ABS analyst who asked not to be named in this story. “They claim free markets, but it’s really the domination of money over common sense.

the economist this week carried a story on the possible transition to covered bonds.

it seems to me that the ramifications go well beyond mortgage finance as well. most credit card and auto loan debt is also securitized through the same conduit. should the changes actually move forward from the FASB to policy, credit availability generally may be significantly affected.

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hi gm,

holy krap, eh? where to begin?

off-balance sheet (a.k.a. "not included in our financial statements" - tsk tsk, heh heh) should never have been allowed - especially after enron.

off-balance sheet made post-enron sarbanes-oxley "perfume on a pig".

fasb and the sec did not drop the ball: they just looked the other way so the PTB could continue to do their thing.

the lesson here is a pseudo-monopoly of our 3 brances of government (republicans and conservatives: 2001-2006) can - and will be - deadly for us.

r.i.p. america.

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