A bad taste has been left in the mouths of investors following a few of the largest blowups the asset-backed market has experienced, according to a pair of buysiders speaking at the American Securitization Forum's first annual meeting last week. The examples of National Century Financial Enterprises, NextCard and Spiegel's First Consumers National Bank were cited as appearances that turned out not to be reality, which have had a stinging impact on investor outlook going forward.
The fact that so many entities - numerous underwriters, rating agencies, trustees and surety providers - had the wool collectively pulled over their eyes does not inspire confidence from the investor community. Citing "no acceptance of responsibility," State Street's outspoken principal Dan Statchel said, "Until a principal accepts responsibility of scratching below the surface, we'll never solve the problem of fraud." TIAA-CREF Managing Director John Cerra added that those in the position to spot fraud "do the legally required minimum on behalf of all."
As a result, Statchel added, "Investors are operating on unclear information."
Using a presale report of a NCFE NPF XII transaction as an example, Statchel said the listed financial strength of the seller/servicer now makes most of those involved look foolish. "Either stand behind the statement in post-mortem or don't list (NCFE's financial situation) as a strength."
The spiteful feelings were not lost on those being criticized. "The fact is that all in this market have to do a much better job going forward if we are going to continue to grow," said Moody's Investors Service Senior Managing Director Brian Clarkson after the discussion. "In my opinion we have a small window to get it right before we lose investor confidence."
While most did agree, however, that fraudulent activity is difficult to spot and impossible to structure for, certain other complaints were aired in the lively discussion. Servicing and trustee fees were scrutinized throughout the session, both for offering insufficient incentive for parties to act in ABS holder interests.
In the wake of FCNB and Conseco Finance - both of which saw servicing fee increases at the expense of bondholders - servicer and trustee representatives defended their fee structures, to little avail. Fitch Ratings Managing Director Kevin Duignan confirmed that from a ratings perspective, a servicing fee change has to be assumed and structured for, regardless of any guidelines included in deal documentation.
F. Jim Della Sala from Deutsche Bank Trust argued that the market doesn't want to pay up for what they now ask. Saying that trustees are willing to offer more, he added that despite "offering a menu, the market is commanding a dwindling list of services." State Street's Statchel joked that the underpaid status of the trustee be included in documentation, adding, "Therefore the trustee won't perform adequately."
TIAA's Cerra theorized that the intense competition among underwriters, trustees and rating agencies has led to fees being cut to a bare minimum and that a possible solution is a market standard for both fees and behavior. "Don't come knocking on my door to pitch a deal with a subordinated servicing fee. It doesn't work," he added.