When the tough gets going, securitize!

July 6, 2009

The FT has a report that banks are looking to slice and dice risky assets on their balance sheet so they can unload some of the capital-gobbling securities to investors. The banks argue that this type of securitization is different than those CDOs that helped suck the financial system into a sinkhole since it doesn’t rely on leverage and it’s more transparent.

The appeal for the banks is obvious. From the FT:

BarCap’s structures involve the pooling of assets from several clients into a secured financial product that can be sold on to other investors and rated by a credit rating agency, potentially reducing the capital allocated against the assets by between 10 per cent and 50 per cent.

Not sure branding it “smart securitization” as Barclays Capital does is the best tactic, however, given investors’ wariness of all things labeled “smart” or “sophisticated.”  Clever financial engineering, after all, brought the global financial markets to the brink last year.

Moreover, I don’t think re-securitization of problem assets is the way to go for the long haul since it simply shifts the risk around again. It also doesn’t stimulate new lending since it’s not packaging new loans, but just repackaging old ones.

But increasingly, this seems to be the way big banks are attacking the problem of unwanted assets. Securitization of old structured products, or re-Remics, in the commercial mortgage-backed securities market has been gaining momentum since Standard & Poor’s warned about pending downgrades for highly-rated CMBS tranches in late May. Still, the deal sizes have been relatively small, with a recent deal, the CGCMT 2009-RR1, totaling just $87 million, according to IFR.

Just how much appetite is out there for repackaged assets is still a big question mark. How regulators will view the latest innovation from Wall Street could also be an issue.

From the FT:

…some regulators may be wary of the invention of new pooled asset derivatives, especially if they are perceived as a way to avoid regulatory capital requirements.

Some rival bankers also view the schemes with scepticism. “This is a system of capital arbitrage,” said one senior banker at another investment bank. “The need for capital just miraculously disappears.”

Yves Smith over at Naked Capitalism also makes a good point that the root of the toxic asset issue remains price. Banks and potential buyers are worlds apart when it comes to valuation. That dynamic hasn’t changed.

Turning to securitization smacks of the banks’ continued reluctance to take a hit ton the debt that has been dogging them for two years now.

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