John Slater

Straight Talk from Geithner on Securitization

My personal estimate is that about 70% of credit creation was occurring outside the regulated banking system at the peak. Of course much of this was structured by the banks to get the assets off their balance sheets, so this is a little misleading. We have not come close to replacing this credit creation capability, which helps explain the deflationary forces still at work in the economy. It will be interesting to see if the big banks can regain the confidence of the markets. It has happened before, but I am skeptical, at least in the short run. Way to many of the pieces of the machine are broken, starting with origination, underwriting, rating of the securities and distribution. I think its going to be a long slog back.


On Mar 30 04:25 PM mark ferraris wrote:

> Two comments:
>
> - I don't know what statistics the Secretary was looking at but the
> combined activity of the securitiazation markets (which includes
> the activity of the mortgage agencies) has for more than 15 years
> outstripped the balance sheets of the banks. It is not less than
> half.
>
> - Every single fix that was introduced prior to the recent "toxic
> asset plan" was window dressing. The new plan is the main course
> and probably should have been introduced first. Many folks just
> get it wrong in terms of how the securitization markets work. The
> first phase of the process is the underwriting of the underlying
> assets. That's what the banks do best (although not so well recently).
> What securitization does is allow these banks to clear their balance
> sheets of yesterday's loans or originations by selling them off to
> what some call the "second market" through securitzations. The investors
> in this second market are nearly exclusively sophisticated institutions.
> Nevertheless, these investors need to be able to rely on the underwriting
> acumen of the banks that created the underlying assets. Over the
> past two plus years the complete erosion in the "confidence" that
> these investors have in the underwriting and structuring acumen of
> the banks is what has brought the securtization market to its knees
> and clogged up the balance sheets of even the most healthy banks.
> Programs like TALF will help to prime the pump but the toxic asset
> plan will have a far greater impact (by multiples of ten or more)
> on freeing up room on the balance sheets of the banks to create more
> assets (loans).
>
> Mark Ferraris
> Principal
> Orchard Street Partners LLC