In all likelihood, most of the ABS community either read or heard about last Wednesday's front page Wall Street Journal story, which implied that the securitization industry's continual pressure on regulators and accounting bodies throughout the 1990s kept the loopholes open through which Enron Corp. pitched its dirty laundry.
Truthful or not, the story failed to distinguish the lender's use of securitization from Enron's pseudo risk-transfers/balance-sheet acts, commented one market participant. "As with many media articles in the aftermath of Enron, the WSJ item broadly equates Enron with securitization, on the basis that both use SPEs and off-balance sheet accounting. In fact, there are many important distinctions... Unfortunately, none of these were noted in the WSJ article," said George Miller, deputy general counsel to the Bond Market Association.
The story elicited immediate, and in some instances, passionate responses from all corners of the industry.
"I think the article was misleading, manipulative and cynical and not a constructive contribution to the SPE debate," said Greg Medcraft, global head of securitization at Societe Generale, and deputy chairman of the American Securitization Forum. "It was imbalanced and largely a personal attack on Jason Kravitt."
"What the article failed to mention was the constructive use of securitizations and SPEs and the benefits that they have provided to the American public," said Vernon Wright, chairman of the American Securitization Forum."
In a prepared statement, Kravitt, head of the securitization practice at Mayer Brown Rowe & Maw, who was mentioned several times in the article, said, "The securitization industry welcomes a healthy debate on the pros and cons of securitization. The Wall Street Journal article focused on the fact that industry representatives wrote to and met with regulators instead of the substance of that dialogue. Whenever very complicated rules are proposed to govern very complicated economic activity, it is essential for both sides to work together to produce rules that make sense. Overly tough rules can always prevent harmful activity, but they may do more harm than good by also preventing even more valuable activity. In my experience, the industry seeks to advocate a proper balance of interests."
"I thought the article was generally accurate but extremely one-sided," said Joe Donovan, co-head of ABS at Credit Suisse First Boston. Donovan felt that a few major points, which could have balanced the point of view, were left out entirely. "First, we're dealing with a $300 billion- to $400 billion-a-year marketplace, which has been a Godsend of liquidity for originators of certain asset types, and which certainly has had an indirect, or direct benefit to consumers, particularly in the area of credit cards, home-equity and autos, which makes up two-thirds of the market."
Glenn Arden, attorney at Jones, Day, Reavis & Pogue, responded that, "It would be unfortunate if the substantial benefits that have flowed to users and providers of capital through the evolution of securitization were to be choked off due to a political and media climate where the players feel the need to malign the entire field in order to do something'.
Arden continued, "I fear that the result would be less financial liquidity for corporate America, with all of the ill-effects on consumers that would imply, as well as a further offshore migration of the significant financial investment banking and arbitrage markets that utilize securitization technologies."
Donovan also noted that the anti-ABS point of view fails to recognize the additional disclosure and performance activity associated with securitized pools, in the form of filings with the Securities & Exchange Commission, prospectuses and offering material, all publicly available to equity analysts, as well as ABS bond investors.
"Also, the [chart of securitization-linked company failures] pointed out the few situations in the last few years that have been problematic," Donovan said. "Where's the list of companies that didn't securitize that got in trouble, such as Mercury Financial and Finova Capital, not to mention the Thrifts in the 1980s."
In fact, the article wrongly associated Mercury Financial's troubles (in the said chart) with securitization, when the company had not begun using ABS until last year, after it had emerged from bankruptcy.
"What took them down was adopting vintage analysis for there own portfolio," Donovan said. "All of a sudden they did their loss analysis based on vintages, and the wheels came off. You had securitization technology applied to a non-securitizer, and oops, they got caught..."
The use of SPEs for securitization has been a tremendous boon to disclosure, Donovan argues. "That article, while presenting one side accurately, neglected the other side, and did the market disservice," he continued. "[The author] left out the fact that a terrific market has been created over the last 20 years, and SPEs are a fundamental reason for it. You need SPEs to isolate those assets. But isolating them doesn't mean hiding them, and we actually provide far greater disclosure than ever existed before, and that's what he's missing."