Comments on: Are the new securitization regulations workable? http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Nate http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/comment-page-1/#comment-2855 Wed, 17 Jun 2009 13:35:54 +0000 http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/#comment-2855 There is another argument for using a separate rating scale for securitized products – which is to prevent them from passing through the “loophole” in investment guidelines for pension funds, insurance companies, etc., that allows them to hold anything with a certain rating. If the senior piece of a sub-prime RMBS is no longer “AAA” but is now “SP-1″ or whatever, then the investment guidelines of these institutional investors would have to be rewritten specifically to allow them to hold these assets, whereas before the issue never came up, even though they should have known that these were not the same as corporate AAAs.

]]>
By: Ginger Yellow http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/comment-page-1/#comment-2850 Wed, 17 Jun 2009 12:35:45 +0000 http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/#comment-2850 “To be honest, I’m not clear on what the old ratings were supposed to mean. Is that a one year probability of default, a five year probability of default, an expected loss over a particular timeframe?”

Well, it varies from rating agency to rating agency, and has changed during the credit crisis, but the basic idea is timely payment of interest and ultimate repayment of principal. This is complicated by several factors – Moody’s rates on an expected loss basis, for example, whereas the others are based on probability of default. Meanwhile S&P has incorporated a new “cliff risk” factor designed to ensure that AAA ratings are not just very unlikely to default, but also likely to be stable – so a low PD isn’t enough – the shape of the loss curve is important.

]]>
By: Ray Lindsley http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/comment-page-1/#comment-2815 Tue, 16 Jun 2009 18:42:08 +0000 http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/#comment-2815 I can appreciate that maintaining “skin in the game” with regards to securitizing loans should lead to more careful loan underwriting, but that retention will also expose the banks to greater risk. I believe that the originators of asset-backed securities grossly misjudged the risks of the instruments that they were creating because they were counting on diversification and a rising real estate market to mitigate those risks. If they have learned their lessons from this crisis, which I believe they have, then they should be better able to manage this risk, and the proposal could help rebuild confidence in the ABS market.

]]>
By: q http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/comment-page-1/#comment-2812 Tue, 16 Jun 2009 18:10:33 +0000 http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/#comment-2812 perhaps more directly: the bank should (or could) hedge risk, but from a capital requirement point of view that hedge should not count. the bank should need to reserve for the unhedged position.

]]>
By: Elodie http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/comment-page-1/#comment-2810 Tue, 16 Jun 2009 16:31:19 +0000 http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/#comment-2810 Well, hedging positions is very important for the bank but the main point is understanding what you buy into.
At the end of the day a loan is part of an investment and therefore you should first understand the asset, then understand the loan. If you are sure of your investment, you can then risk and diversify in the loans sector you originates.

CDO and these type of complex products which were used to hedge between investments (not simple interests swap or currency hedging which are very usefull and easier to understand) were wrongly assesed and therefore not covering the bank anyway…
so if we could come back to basics (understanding of the sector you invest in wether in equity or loan) that will be a hughe improvement!

Concerning rating agencies, they are too costly, too inefficient for our financial system and will always have a conflict of interest wether they works for banks or investors. Funds should only trust their analysis of a business… not delegate and then blame!

]]>
By: dWj http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/comment-page-1/#comment-2809 Tue, 16 Jun 2009 16:14:05 +0000 http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/#comment-2809 To be honest, I’m not clear on what the old ratings were supposed to mean. Is that a one year probability of default, a five year probability of default, an expected loss over a particular timeframe? I seem to recall that the one-year probability of default for corporate bonds is pretty well exponential with credit rating, with a bump of one minor level (i.e. A to A+, or A+ to AA-) reducing the odds of default by about 44%, but it was never clear to me whether that was what they were targetting; for debt-backed tranche securities, recovery rates would make a big deal.

]]>
By: Gari N. Corp http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/comment-page-1/#comment-2808 Tue, 16 Jun 2009 16:03:00 +0000 http://blogs.reuters.com/felix-salmon/2009/06/16/are-the-new-securitization-regulations-workable/#comment-2808 Is that 5% a first loss/equity exposure, or a pro-rata share of total losses/exposure? The distinction’s important, and I can imagine a CRO having more problems with being unable to hedge the first than the second.

]]>