Panelists at ASF 2011 looked at the business implications of securitization policy reforms given that there are supposedly over 200 rulemakings and over 19 provisions associated with securitization in the Dodd-Frank Act.
Michael Speaker from the U.S. Treasury said that the government agency’s view on ABS is that it is less concerned with securitization for securitization’s sake than the ultimate macro economic goal, which is to efficiently direct funds to U.S. consumers and small businesses.
He pointed out that the Treasury is not opposed to securitization given that it has used the structure in the past, specifically to fund Chrysler Financial through an auto-backed ABS transaction.
The current regulations have not deterred new entrants from coming into the market, many of whom are using the securitization structure as a diversification tool, said Bob Behal, vice president at The Vanguard Group. He added that the reforms are meaningful to the extent that they offer investors certainty, noting that there are minimum standards that need to be established for the ABS market to move forward.
Behal said that because of current regulations, investors have shied away from being over reliant on ratings and have used independent tools for their analysis, something that Vanguard has historically done even before the crisis.
Douglas Murray, senior managing director at Fitch Ratings, said the market should be using many sources to analyze securities and not be solely dependent on the rating agencies. He presented data that showed that for 17 years, Fitch ABS ratings did well. From 1991 to 2008, there were only 0.58 impaired ratings. According to the data, it was in 2009 where the number rose to 3.37 impaired ratings.
David Moffitt, global head of structured solutions at Morgan Stanley, said that ratings helped in the fungability and velocity in securitization transactions. It also gave a value proposition for triple-As, which allowed ABS players not to do their homework.
Panelists discussed 17g-5, which was adopted as part of the Credit Rating Agency Reform Act of 2006. It compels Securities and Exchange Commission-registered credit rating agencies or nationally recognized statistical rating organizations or NRSROs to comply with certain limitations and procedures. These requirements were implemented to mitigate perceived conflicts of interest.
Murray said there have only been three downloads in Fitch’s Web site related to this provision thus far. He added that 17g-5 exposes the rating agencies to increased liability and it involves giving the rating agency’s opinion for free, which is “not the best business model.” He lamented that Fitch had to go through 10 years to prove its reputation as a rating agency, so there is no benefit for them from giving out unsolicited ratings on transactions.
In terms of non-rating agency related regulations, Bianca Russo, managing director at JPMorgan Securities, said since regulations have cost the loss of the benefits in securitization due to the increased regulatory capital, banks will only use the structure when it makes sense for them versus other funding sources.
The panel ended with Moffit saying that ABS players should engage the regulators in conversation by giving them information on how the securitization structure works.
He said that an area “we have to very careful in” is the private market, which he called the cradle of innovation. Most securitization deals, he said, started through bilateral arrangements and the securitization structure has become incredibly efficient because of the many innovations that have been made via the private market.
