02/13/2009

Vegas Crowd Torn by Uncle Sam's Role

Many securitization professionals came away from this week's big industry gathering in Las Vegas feeling conflicted and increasingly nervous about the U.S. government's expanding role in the market.

On the one hand, most of the 4,200 structured-finance pros who registered for the American Securitization Forum event were eager to hear from and question the hundreds of federal officials and regulators who turned up in Las Vegas. Market players arrived at the trade group's conference with their hands out, hungry for details about how the government will use mountains of taxpayer money to inject badly needed liquidity into the stalled credit market.

On the other hand, many securitization specialists confessed to nagging fears that the battered industry is ceding too much control in its hour of desperation. Long after the economy pulls out of its slump, the once-booming securitization business is likely to be far more modest - and far more heavily regulated - than it was in its heyday.

"I've never seen so many regulatory guys in one place before," one investment banker said. "They're everywhere. They make me nervous."

Several years from now, "There's going to be a massive effort to extract" the government from securitization, SIFMA president T. Timothy Ryan said. Industry players have to take their medicine with a smile for the time being, however, because only the federal government appears to have the wherewithal - and the inclination - to jump-start the frozen market.

At least 10 regulatory officials gave speeches at the ASF confab or participated in panel discussions, and most took those opportunities to reprimand the industry. They were especially critical of banks and other private-label lenders for playing fast and loose with home-loan underwriting standards, holding them partly to blame for the collapse of the overheated subprime mortgage market and a worldwide credit crunch that took hold in mid-2007.

Federal officials also took the industry to task for creating a dizzying array of complex structured-finance products, such as synthetic CDOs, that masked the true risk tied to underlying mortgages. "We need simple and transparent structures. The markets can't even price what's out there right now," said Sandra Thompson, director of Supervision and Consumer Protection for the FDIC.

In the end, the government horde delivered a clear message to the industry: To survive, securitized products must be put together in a way that makes it easy for investors to assess risk and price bonds accordingly.

Those sentiments were echoed by a number of industry stalwarts, such as Paul Colonna, investment chief for the fixed income division at GE Asset Management in Stamford, Conn. "We made the structures too complex. We've made the industry too complex," he said.

"We need to move away from the rocket-science approach," said Tom Morano, chief executive of Residential Capital, GMAC's mortgage-lending affiliate. "We've sliced the tranches too much," he added, recalling the long-ago days when home-loan securitizations usually consisted of just a few subordinate classes.

Other government officials who spoke at the ASF conference included James Lockhart, director of the Federal Housing Finance Agency; Kathryn Dick, deputy comptroller in the Office of the Comptroller of the Currency and Scott Polakoff, chief operating officer for the Office of Thrift Supervision.

Apart from talking about the government, conference attendees also spent a lot of time bemoaning the prolonged lack of issuance and the difficulty of pricing trillions of dollars of distressed asset- and mortgage-backed securities that are languishing on the secondary market.

Meanwhile, the fear of additional layoffs pervaded many conversations. No job is safe, even though thousands of industry professionals have already been put out of work over the last year or so. In fact, word has it that one MBS salesman actually got the ax while attending the conference. He received the bad news Monday afternoon via cell phone.

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