PHOENIX - If conference attendance is any indicator of an industry's health, the asset-backed market is in decent shape. As many as 1,700 ABS professionals were gathered at the Biltmore last week, in what some were calling the "the biggest one yet."
State Street's welcome reception was an elbow-to elbow affair. There was barely sitting room at Citibank's South of the Border' luncheon.
"We are now, today, 16 years after the inception of the non-mortgage asset-backed market, and there are lots of different issues that are facing us today, from the regulatory accounting and legal [arenas], these continue to jump up in front of us," said Vernon Wright, vice chairman and chief financial officer at MBNA America Bank. According to Wright, possibly the most significant and trying issue currently facing the industry is the bankruptcy of LTV, which was filed at the end of December last year.
The bankruptcy is challenging in that the two securitizations the company did were actually financings as opposed to true sales, which could disrupt the trusts, should the assets somehow be transferred back to LTV's balance sheet. The legal outcome of the issue could be a defining moment for the industry, Wright said.
Other issues include the Basel Proposal, the Federal Financial Institutions Examination Council's guidance on subprime, and FAS 140, which will be implemented in full starting April 1, 2001.
Highlights
A surprise addition to the opening ceremonies: CDO pro Eileen Murphy sat on the first panel to represent the collateralized debt obligation perspective in the globalization of the securitization market.
The financial press has, apparently, not agreed upon the details of Murphy's professional whereabouts, although, at the conference, Chase Securities appeared below her name on her I.D. badge.
For the record, Murphy said, "Post merger, J.P. Morgan did not have a position to offer me analogous to the global role I held overseeing Chase's CDO business, although Blythe Masters and I had tried to identify what alternative roles might been appropriate; however, in the end, the landscape had changed so dramatically, and J.P. Morgan and Chase have a lot of senior talent to work with, so it made the most sense for me to exercise my option to leave."
Currently Murphy is finalizing her resignation at Chase, and interviewing with a number of different firms, including other underwriters and reinsurers.
Consumer credit
Of course, the slowing economy was a major topic of discussion during the introductory sessions. Views were divergent on the severity of the economic condition and its impact on ABS.
On a panel that opened with the Top ten reasons you know you're heading for a recession,' Craig Platt of Keycorp took what Morgan Stanley Dean Witter's Gail McDonnell called the draconian' viewpoint.
"My own view is that we're slipping toward recession," Platt said. "I think you've got, in short, an economy that's tighter, and if it's not catching a cold, it's darn close to it."
"I think in retrospect, when you look at the numbers, you'll find we're in a recession right now," said Steve Thompson, a managing director in Prudential Structured Finance Group.
As many analysts have been saying over the last month or two, subprime assets are going to get hit the hardest in the event of a harder landing.
"This is going to be a problem, and it's going to be a problem in the second quarter, and I think there's going to be some losses sustained in the subordinate pieces, probably in those late 1990's vintages," Thompson said.
The tightening credit environment will drive the market towards larger, more liquid issues, said MSDW's McDonnell. Also, ABS might be seen as a safe haven for investors going forward, as corporate credit dwindles.
However, others believe that ABS will get its share of correction.
"If you believe that we're in a recession, during the last three, the increase in unemployment was over 3%," said Ronald Mass, portfolio manager at Western Asset Management. "If we're at 4% and we go to 7%... you could easily see 50% increases in the level of charge-offs in some of the more standard products."
Triple-A's
As the opening ceremonies were paneled by investors, issuers and investment bankers, an interesting discussion broke out on the whether the triple-A rating is ubiquitous.
"All triple-A's are structured to be the same," said session facilitator Brian Clarkson, managing director of the asset-finance group at Moody's. "At the end of the day, you're going to have every transaction perform differently. If you take every transaction that's ever been issued, the vast majority of them pay off, but there's one or two that doesn't. A rating is not necessarily a guarantee, it's an opinion with respect to the creditworthiness at the time of issuance."
"We believe that all triple-A's are not alike," said Daniel W. Stachel, a principal at State Street Global Advisors. "The ratings agencies believe that all triple-A's are alike, and the investment banks believe triple-A's are alike when they're selling them to you but not when they're buying them back."
Bermuda Bahamas?
Meanwhile, Strategic Research Institute's ABS Symposium, which is on its second day going, should be having decent turnout as well, although a number of IMN attendees weren't heading to Scottsdale. A number of firms, for example MBIA and Moody's Investors Service, said they send different groups to each conference, so expect to see some new faces despite similar company rosters.
On the conference controversy: at least a few sources, who chose not to be named, said that in the near-term most ABS professionals will have a good idea which of the two events they'll attend in the fall.
As it stands, IMN's ABS East, which takes place in the Bahamas, is scheduled to start Oct. 2 and end on Oct. 5, while SRI's Bermuda ABS Symposium is scheduled to start Sept. 30 and end Oct. 3, two days into IMN.
"Everyone is going to go where everyone else is going to go," one source stated.
