The Bankwatch

Tracking the consumer evolution of financial services

“Securitisation is not the work of the devil” | S&P beg to differ

There is more than a little irony in this comment from Gareth Davies, head of European ABS research at JPMorgan.  The best part is that he notes it will set the market back from the last 12 months positive momentum.  No kidding Gareth and I am sorry your bonus will be less!

European securitisations face S&P downgrade | FT

“Its not the impact on the ABS professional that I worry about; they’re hardened from three years of torrid markets. Rather it’s [the impact on] the risk managers and senior managers since we’ll now have to explain again that securitisation is not the work of the devil,” said Gareth Davies, head of European ABS research at JPMorgan. “This really sets the market back in terms of the positive momentum that had been building for the last 12 months.”

This action by S&P is precisely the right kind of action that is needed to get some change implemented in the securitization market.  Why should we care?  The vague reference to “counterparty” in this article is speaking about banks.  Banks are required to sign up and place their name against this paper before it gets rated by S&P and is sold on the market. 

Sound familiar.  It should.  This is precisely the same commercial paper (ABCP – Asset Backed Commercial Paper) that caused the crash in September 2008 when it was determined no-one knew how much it was worth.  In return the banks chose to stop trading with each other and the market froze.

What S&P are proposing here (3 years later) that when a counterparty (bank) suffers a drop in its credit rating it must post collateral.  This has the effect of the bank being limited in their other methods of lending because it has the effect of bringing at least part of the ABCP ‘on balance sheet’ and on balance sheet is subject to Basel 3.

Under the new rules, if a counterparty for a derivative such as a swap drops to A minus, it will be required to post collateral within 10 business days. If a counterparty drops to triple B plus (the lowest investment grade rating) they have 60 days to replace themselves with another eligible counterparty

Relevance to Bankwatch:

I wrote about bank leverage during the crisis, the lack of broad understanding about the fragility of banks here and a bunch of relevant links here.  Will the S&P action slow down securitisation – of course it will.  that is the point which the JP Morgan rep above is missing.  The point is to slow things down by reducing banks ability to lever themselves off balance sheet.  This is the missing link in any regulation that has occurred since the crash.

What I fail to understand is that recovery has been replaced by politicians with the proxy of recovering stock markets.  Meanwhile governments are borrowing like crazy (US Fed balance sheet is now 2.5 trillion – compare that to a relatively static $900 Bn pre crash).  It jumped by 1/2 a trillion just last week.

Anyhow well done Standard and Poors.  When the first sovereign defaults show up later this year and 2012 and we see the impacts on the banks as the predominant bond holders, and that collateral S&P hold from the banks will be worthwhile.

Expect a rocky road up ahead for Banks.

Written by Colin Henderson

January 17, 2011 at 17:57

Posted in Uncategorized

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