Securitisation: The securitisation market is looking healthier than it has for a year or more. Deal flow all but dried up in the US for a few months after Lehman Brothers’ demise last September. But the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or Talf, helped resuscitate the market this year by partially underwriting new transactions. That helped bring average spreads on older deals backed by credit card and car loans to their tightest levels since last August. But securitisation’s recovery is still no sure thing.
Granted, the industry’s name is mud in many circles. But that’s hardly unusual whenever a financing tool is at the centre of a bubble and its bursting. And the opprobrium should fade over time, especially as the crisis has forced changes on the asset-backed market. The industry itself is improving transparency and the crash eliminated many of the worst excesses – as well as the misconception that securitisation could magically morph any loan into a safe investment. There is now much greater recognition that players should analyse the underlying assets rather than blindly relying on ratings.
A greater hindrance, though, could stem from some of the plans the US has for reforming securitisation. For example, it has proposed mandating that banks keep asset-backed securities, including older deals, on balance sheet. That risks soaking up much-needed capital and could make securitisation less economical. JPMorgan boss Jamie Dimon has already said it’s unlikely the bank will use securitisation to fund its credit card business once the rules change next year.
Meanwhile, a plan to force issuers to keep 5% of any deals they sell is supposed to encourage better lending standards. But it could simply increase the costs of securitisation without any clear benefit. After all, lenders using securitisation have always had skin in the game, such as the requirement that they buy back any mortgage loans that are fraudulent or default quickly. It’s just that in the bubble many ignored that risk. And credit card companies can rejig the loans in their deals to protect investors – one reason why such securitisations have held together well.
Sponsoring Talf shows that the US government understands the need for securitisation, which in recent years has accounted for up to half of all consumer lending. But its ideas for reining in the market could restrict securitisation’s usefulness.
