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Keith McCullough
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Research Edge, LLC ( is the leading real-time research firm. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottoms-up and macro analysis with an emphasis on timing. The Research Edge team features... More
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  • Banks Discover Securitization - Who'd 'A Thunk It? 1 comment
    Jul 13, 2009 2:06 PM

    And Now For Something Completely Different
    “Banks Reinvent Securitisation To Cut Capital Costs” reads the Financial Times headline (6 July). The story describes efforts at “smart securitization” by Goldman and Barclay’s to package billions of dollars’ worth of customer assets in vehicles that can be rated by credit rating agencies, then sell them on to third parties.
    This brilliant new strategy will enable the originating banks to reduce their capital requirements, by taking the assets off their books, and replacing them with cash.
    Call us cynical, but we suspect they will be fast-tracked to the market with their products before second and third-round me-too-ers find the door has been slammed shut.

    On the face of it, Barclay’s is offering a clearing system for banks to factor productive assets, swapping balance sheet liability for cash today, thereby freeing up regulatory capital.

    Observers of the current crisis generally agree that bank capital needs to be increased to prevent repeats of the current dismal scenario, and that the quality of that capital should be more robust. This means holding larger reserves – which means lower returns. It also means retaining more of a bank’s liabilities on its own books, not shunting them off to third parties. This means less liquidity.

    What we find impressive is the acceleration of the pace of innovation in the capitalist model. No sooner has the world gotten comfortable with the “R” word – “Recession” – than serious market pundits are talking about a new bull market, and governments and global economic organizations are talking about “already being in a recovery.” Global powerhouse banking firms (Merrill, Morgan, Goldman…) are putting out bullish reports urging folks to Buy China (up some 70-80% since January) – if the recovery is to gain steam, the banks will have to sell their inventory to someone…

    And now, the ink not yet dry on President Obama’s white paper, the bankers are getting back into the securitization business. Factoring assets is a simple business. Factoring assets, as presented by Barclay’s, is sure to become complex. Even a small wrinkle – one single swap in lieu of actual cash – will create an opening for follow-on participants to wreak havoc. We wonder when that first loophole will be probed. We wonder whether any regulators are actually watching.

    We are staying tuned.

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  • Bigbilly2
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    There was another spasm of ignorant and facile outrage last week when news broke that Goldman Sachs and Barclays Capital were – horror of horrors – using securitisation techniques to parcel up legacy bad assets. If the hyperventilating hordes knew that much of the banking industry was either doing exactly the same thing – or was thinking of doing so – heaven knows what the reaction would be.


    The accusation seems to be that the banks are gaming the regulatory capital system by pretending to sell the assets but then actually keeping the exposure themselves.


    What the banks are, in fact, doing is packaging up the loans and, after a significant haircut, selling a junior piece to outside investors, leaving themselves holding a senior chunk that could stand losses of, say, 50% before further write-downs are necessary. In the process, of course, banks are reducing leverage and/or freeing up money for new lending – which is exactly what they are being pressured to do by that self-same commentariat.


    If the pundits really want to hold the banking industry to account, it would help if they knew what they were talking about.
    14 Jul 2009, 06:15 AM Reply Like
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