tlsc

Are the New Securitization Regulations Workable?

1. re the retaining 5% of the notional of any tranche of securitisation - what's the reasoning behind this idea? is it to keep the bank honest so that it shares the risk of the tranche with the investor? caveat emptor - buyer beware - is a principal of business. what is the root issue - i think that the root is to ensure that complex product should not be sold to unsophisticated investor. that's where the risk assessment comes in. the seller should be made responsible for ensuring that the investor is able to understand and had understood the product sold, and that bar should be high eg if the financial institution sells a product to a mum on the street, the assumption should perhaps be that the buyer has little knowledge, and the burden of proof is on that financial institution to prove that the buyer did understand the product. such a law would, for example, help the numerous HK and Singapore buyers of the Lehman mini-bonds which included embedded CDO tranche.

in addition, not allowing a bank to hedge a risk is simply dumb. risk should naturally go to the entity that is best able to accept and manage the risk. again one has to look at the root cause - eg AIG sold protection on ABS, accepting the risk, the problem is no regulator was monitoring AIG in this area of its business, and that is the root cause. hence the systemic risk regulator is a great idea, however, it is unlikely to go far - likely to be watered down in the politics of the day - and it requires co-ordination of global centers regulators. what are needed IN ADDITION to the systemic risk regulator is to ensure, among others, (a) outside auditors are able to assess risk (b) robust and strong accounting standards (c) internal risk management which is not only independent of the day to day management but also consistent across the financial companies (d) strong BIS and capital regulations, and ensuring that the sign post does not shift eg in the current crisis, other forms of Tier 1 like hybrid capital and equity linked capital instruments are treated not as capital and core common equity is the seemingly only acceptable capital.

2. re the requirement that rating agencies do not treat ABS like a corporate debt. think about it, an SPV, is like a corporate with only a single business with a pool of assets, and issues debt and equity (ie the equity tranche is treated as equity). regulators need to again go to the root cause - which, i think, are the robustness of the credit rating methodology as well as the internal conflict of the rating agency - on one hand to rate the instruments and on the other hand, to get paid. too often, the structurer of the ABS would shop among the rating agencies to get the best rating possible - and this should perhaps be stopped. in addition, among others, (a) rating agencies should be required to split the business of rating and payment, similar to accounting firms which were required to split advisory and auditing, (b) regulators themselves must not be overly dependent on ratings in their various testings which gives the wrong impression to investors.

Revisiting the Merrill Acquisition

Few missing questions that people (and the congress men) seem not to take note in the Fed and Treasury action
1. Bernanke said that he viewed Lewis's threat of using the MAC as a bargaining chip. What is this bargaining chip? Is this to get more help from the Fed and Treasury or to bargain for a cheaper price to acquire ML? If the latter, than Bernanke called Lewis's bluff. If the latter, than see below.
2 Bernanke viewed that the use of MAC is not credible which suggested that he did not believe that the MAC could be used. If he did not believe that MAC could be used, and if Lewis indeed used it to get out of the deal and failed, not only did BofA had to pay penalty, it could also severely weaken BofA, not to mention ML and the economy. If this is the case, does this not call into judgement of Lewis and the Board in using/approving the use of the MAC, and warrant for their removal? and if so, the call to remove Lewis and the Board is not a threat but a considered decision.

Ken Lewis: The Government Made Me Do It!

Few missing questions that people (and the congress men) seem not to take note in the Fed and Treasury action
1. Bernanke said that he viewed Lewis's threat of using the MAC as a bargaining chip. What is this bargaining chip? Is this to get more help from the Fed and Treasury or to bargain for a cheaper price to acquire ML? If the latter, than Bernanke called Lewis's bluff. If the latter, than see below.
2 Bernanke viewed that the use of MAC is not credible which suggested that he did not believe that the MAC could be used. If he did not believe that MAC could be used, and if Lewis indeed used it to get out of the deal and failed, not only did BofA had to pay penalty, it could also severely weaken BofA, not to mention ML and the economy. If this is the case, does this not call into judgement of Lewis and the Board in using/approving the use of the MAC, and warrant for their removal? and if so, the call to remove Lewis and the Board is not a threat but a considered decision.

FDIC Delay of Legacy Loan Program Is Not a Surprise

The powers that be should have a review on Sheila Blair.

The reason that Sheila Blair gave to delay PPIP is a red herring! If Banks can sell the legacy assets to a Buyer on a willing buyer willing seller basis with the relevant support for the regulators, this is good for the bank, the industry and the economy.

In addition, the reported actions of FDIC vis-a-vis Citi is simply meddling, unnecessary and destabilising.

Bank 'Stress Tests' Expose Cracks in Citi, BofA

Article would be a lot more helpful if it contains detailed analysis of why Citi or Bac require additional capital. Foxx-Pitt has issued a detailed analysis of why additional capital is not needed, and unless I'm reading it wrongly, capital is only needed if the stress test scenario is severe. However, I question the severity of the test using scenario like 12% unemployment as it would contradict what Bernake and company being saying about the economy.

Krugman, Don't Throw the Baby Out with the Bathwater Just Yet

I agree with your comment on Krugman. He is being quite a myopic. Looking at the behaviour of congress, how can anyone continue to suggest nationalising any bank or any instituition - ridiculous!

Yesterday's Rally Is No Silver Bullet

1. i would think that private investors would be interested in the Geithner's Proposal depending on the haircut to the asset. private investors have been using such structure to invest in their private assets and the structure is not new. using your example of $0.85, and the private investor provide $0.05 of equity. if there is no default on the asset and the asset matures, than the private investor will earn $0.075 plus the portion of the interest during the life of the assets less expenses and government's share. simply on the principal amount, that's a total return 150%. i would reiterate that whether the private investor would invest would depend on the haircut and the type of asset, but Geithner's Proposal is attractive, and I would invest in the proposed Blackrock's proposed mutual fund. To be clear, the private investor would not invest in all assets, but this Geithner's Proposal is a start, and it could be modified accordingly.

2. regarding the write down of 7.5% in your example, that 7.5% will be deducted from total capital (ie the tier 1 and 2) and not just from the TCE.

thank you