In light of the recent challenges to the securitization markets, prominent researchers from various firms have embarked on a wave of retaliation, pointing out that many of those aligning the ABS market with Enron do not fully understanding the concepts they are criticizing.
Last week both Banc One Capital Markets and Merrill Lynch distributed research - Banc One's piece entitled In Defense of Securitization, and Merrill Lynch's entitled ABS - A Market Under Siege?. In their research, both banks note that it is investor reporting that should be scrutinized rather than the ABS market.
"To accuse the securitization market of being some kind of secret society cloaked in technical jargon is unfair," pens Banc One researchers John McElravey and Alessandro Pagani. More to the point, Merrill Lynch's Dan Castro states: "It is important that lawmakers take the time to understand what securitization is and how it works before creating policy."
Due to the recent actions of the FDIC with NextCard and the congressional scrutiny over Section 912 of the pending Bankruptcy Reform Act, the ABS market "is probably under the most intense scrutiny of its history," according to Banc One's McElravey. "Past challenges, such as last year's LTV Steel were more a technical and legal issue rather than a question of is this a type of behavior that we want to allow.'"
McElravey also pointed out the difference between securitization, with bankruptcy remoteness through a true-sale, and structured finance in general, such as the over-leveraging of pipelines and fraudulent contract monetizations, of which Enron is guilty.
Senate democrats are seeking to remove the aforementioned Bankrupcy Act provision that would "provide legal certainty" for the protection of securitized assets in the eyes of a bankruptcy court. Merrill notes that the issue that is erroneously brought up is with the retained risk and the funds set aside by banks to cover said risk but, "the real discussion should be focused on disclosure, so that there is transparency to all interested parties."
Banc One concurs, asking, "Could investor reporting be improved? Of course it could. Adding "securitization is an essential part of the U.S. capital markets," Banc One says that term ABS accounts for 9% of all outstanding corporate debt and that ABCP is roughly 50% of CP outstandings.
Banc One goes on to note the many companies in various sectors that successfully and honestly use ABS as a funding source, and even says that ABS adds "market discipline to a company's operations."
"Those firms with stable equity capital and viable business models have prospered. Other firms without those attributes have exited the market," the report adds.
Banc One's McElravey, an alum of The University of Chicago, thinks these challenges will be good for the ABS market in the long run, taking the whatever does not kill you makes you stronger' approach.
In summation, Banc one says that balance sheets should more accurately reflect retained risk in off-balance-sheet transactions and that any scrutiny or resulting changes would be "bad news for the few that have abused structured finance technology. But it is good news for the vast majority of market participants," according to McElravey and Pagani
