I think we'll all be learning a lot about the obscure and complex Securitization Markets, over the next year -- at least those of us wanting answers. Ben Bernanke, Alice Rivlin, Paul Krugman, are identifying this little known "investment vehicle" as a major cause of Banking Credit Crunch now.
So what's the problem with Securitization Markets?
Buying Bonds Into Supply
By David Gaffen, blogs.wsj.com -- Feb 10, 2009
( On the other hand, securitization markets are basically dead, with just $4.6 billion sold in the asset- and mortgage-backed markets. )
(emphasis added)
http://blogs.wsj.com/...
Wondering what is Toxic, about those Toxic Asset Securities?
just keep reading ...
Can the Feds Uncrunch Credit?
Nicole Gelinas 1-19-2009
American homeowners, consumers, and corporations owe roughly $25 trillion, according to Federal Reserve data. But American banks lent only about $8 trillion of that total directly -- that is, keeping the loans on their own books. Bondholders and other traditional lenders provided another $7 trillion. The remaining $10 trillion, according to Standard & Poor’s, came from the securitization markets, a relatively new invention.
Starting in the eighties, banks decided that they didn’t need the bother of holding on to loans, such as mortgages, forever. Instead of being permanent middlemen, they would become temporary matchmakers, structuring all those mortgages and credit-card obligations into securities, much like corporate bonds, and selling them to global investors.
...
The purchasers of these "securitized" financial instruments—from the Luxembourg government to Finnish school districts to midwestern pension funds -- no longer had the protection of the bank’s own credit in the middle to assure payment in case the underlying borrowers defaulted. But these investors didn’t worry much because, particularly over the past decade, securitization seemed such a sure thing.
...
The securitization markets quietly started to close down in the spring of 2007, after sinking home values and rising loan losses proved how fragile their financial engineers’ assumptions had been. They seized up utterly 18 months later, in the autumn of 2008, and global investors now won’t lend money through them at any price. More than a third of our private credit markets, then, are gone.
...
Now the government is working desperately to figure out a way to replace them. Without access to easy borrowing, workers can’t buy cars. Farmers can’t plant crops. Toy importers can’t pay their Chinese factory suppliers, meaning that the factories can’t pay their workers. ...
(emphasis added)
http://www.city-journal.org/...
Basically, Banks decided they didn't want to "own" Mortgages anymore (Credit Card debt either). So they bundled them up and sold them to the highest bidder on the World Market, like Bonds. ... Profits were easy in the era of sub-prime Mortgages, when the Housing Asset bubble just kept inflating. (And no one worried about what a Home would be worth next year.)
Now however, no one wants to own those "hot potato" Mortgage-Securities, and so the source of funds, for the Credit Market has dried up. The days of Easy Credit are past.
The Credit Party is over.
(For a "Close to Home" example on how these Toxic securitized instruments were bundled up for quick profits, take a look at the "unregulated" Credit Default Swaps (CDS).)
How to Revive Securitization Markets
By Robert C. Posen, Opinion, WSJ -- APRIL 29, 2008
Most markets for securitized debt have dried up. The cause is uncertainty: Since no one knows exactly who owns the potential losses from securitized mortgages, many investors stay away.
...
Securities and Exchange Commission ... can take a big step toward reviving this critical part of our financial market. It should recommend that the regulators require someone to "own" the securitization process as well as require more disclosures about who will bear the losses from the assets underlying these securities.
(emphasis added)
http://online.wsj.com/...
SO there you go --
Wondering what is Toxic, about those Toxic Asset Securities?
The Toxin is Uncertainty.
Uncertainty about ownership of the securitization process itself?
(ie Regulations, Standardization, Oversight, Transparency.)
Uncertainty about WHO actually owns the risk, when assets behind those "off-the-books" Securities actually start failing?
(ie When Banks start folding, when Mortgages start foreclosing, WHO takes the hit on those Security Instruments. Ultimately it boils down to who is underwriting that Derivative Paper ...)
This is the WHY, behind "Why Banks Can't be allowed to Fail!"
(They learned that "Domino Lesson" the Hard way, with Lehman Brothers, and then AIG -- They discovered that Banks have all been trading their "bad paper" to each other. And betting "on margin" to boot.)
Think I'm over-reacting? Well take a few minutes to Watch the PBS analysis of the new Geithner "Banking Rescue Plan".
Ben Bernanke, Alice Rivlin, Paul Krugman and other Experts, identify this failure of the "Securitization Markets" are a KEY Problem, behind the Credit Freeze.
Here's the PBS Transcript of those interviews. (2-10-2009)
Here are some key snippets: (Let's just say Krugman is still a bit skeptical.)
Geithner Revamps Bank Rescue Plan PBS Report
The Treasury Department outlined an overhaul of the financial rescue plan Tuesday as the stimulus bill moved forward. Economists and analysts react to the developments.
BEN BERNANKE, Federal Reserve chairman: Congresswoman, one very important fact about the American financial system is that only about half the loans in normal times come through banks. The other half goes through other kinds of markets like securitization markets.
...
ALICE RIVLIN: The one thing we do know is we need a functioning banking system and we need credit flowing again, because unless we have that, nothing else matters. The stimulus plan will create jobs, but unless banks give credit and people are able to get car loans and consumer loans and so forth, the economy just won't function.
...
ALICE RIVLIN: Oh, I think that is a very interesting part of this program. The part of the economy that is closest to the consumer is the consumer loan, the auto loan, the small-business loan, and those need to be flowing again.
And the reason they're not flowing again is that we habitually securitize those. We package them into securities, and there's no market for those securities.
...
DON MARRON: Well, the answer is that the government has to put in as much money as it needs to get this done. The key issue here is that these securities and the things that underlie them are not liquid. In our markets, the more liquid something has, the more value it has, usually. Right now, they can't be sold, partly because they can't be valued and partly because they're just way too complex.
So the government is approaching it two ways. It's talking about the new things that Alice was talking about, new securitizations, new packaging of new loans. Now, that is crucial to get the banks restarted in lending; that should be able to be done.
...
PAUL KRUGMAN: ... I mean, the way a lot of us have been looking at this is that it looks as if a substantial part of the banking system -- quite a lot of the major banks -- are probably actually not viable right now. They actually -- if you were really going to look at what the market would be willing to pay for their assets, they actually are insolvent.
And what you -- what's called for, ultimately, is something like what happens with a failed bank. The government does not shut it down. The government seizes it, cleans out the stockholders, what was done with failed savings and loans. The government takes the bad assets, also pays off some of the debt, essentially a temporary nationalization, getting banks back. They did not bite that bullet, but they did not rule it out, either.
GWEN IFILL: They bit part -- he went kind of halfway on that, didn't he?
PAUL KRUGMAN: Yes. I mean, in fact, look, the favorable interpretation from my point of view is that this whole thing with the stress testing may end up being sort of a Trojan horse to smuggle the good guys into the fortress, that the public isn't ready, Congress isn't ready for major nationalization, but this is a way to set things up so that, if that proves to be necessary when you can take a good, hard look at the books, we sort of got the mechanism in place.
That's what we're hoping the plan means, but, you know, it was really pretty unclear what exactly is going on.
...
DON MARRON: Well, I don't think that nationalization is something anybody would like. On the other hand, if you take the money from the government, you have to play by the government's rules.
And I think the issue here is, the banks got into these kinds of businesses and these kind of securities because they were highly profitable back in the old days, in '07 and '08.
What the government is going to have to look at now is, if you take that business out of the bank -- that is, you buy those toxic assets or you neutralize them -- is what you have left, an intelligent, healthy business, which carries out the major function of the bank, which is to take your money safely and give it back to you when you want it, and to make loans to you, and the "you" are individuals, they're small businesses, and they're big corporations.
...
PAUL KRUGMAN: And the big disappointment was that they have not, in fact, come up with any clear plan about what it is they're going to do about the fundamental weakness of the banks.
...
PAUL KRUGMAN: And one of the problems we're having right now, which I think is part of why everyone was disappointed with this announcement, is that nobody is really ready to wrap their minds around the scale of what needs to be done. And even the Obama administration is not ready to wrap its mind around that.
(emphasis added)
http://www.pbs.org/...
SO, Until we address the Toxins, and find some way to bring Liquidity -- "external money" back into the credit system -- someway to attract that "Global Sideline Money" back into the game, Investors willing to "Underwrite all the risk" of those American Loans, well it will likely stay much the same -- Business as Usual -- Contracting --
With next to NO Loans are to be had!
The Days of the Easy Credit Party are over!
At least, until the "Risk and the Reward" Metrics of our "global" Credit Markets can be accounted for anyways, in a Transparent, and Standard, and Regulated ways, hopefully this time.
That's the way I read it anyways ...
Whatever happened to "Pay as you go"
as an Economic philosophy?