DealBook reports that junk bond king Mike Milken is trying to defend securitization. Despite pleading guilty to six felony counts of securities fraud and conspiracy, paying $600 million in fines and spending 22 months behind bars, Milken is still quite highly regarded. But the defense he offers of securitization is pretty thin gruel.
Milken and I both studied under the same professor at Wharton -- making me feel a bit like Forrest Gump. After he taught Milken, the management professor told me that he concluded Milken would either make enormous amounts of money or land in jail. The professor's prediction proved correct -- except that Milken did both.
Milken's defense appears to be that securitization and surgery are alike. DealBook quotes Milken as saying that criticizing securitization - the slicing and dicing of debt that he helped popularize - is "like condemning scalpels because a few unqualified surgeons have injured patients."
As I posted here, I think securitization needs to end because the stated value of its securities have no credibility, its ratings quality is compromised, and its valuation models based on past performance have proven to be of little use in predicting the future.
Is it possible that Mike Milken is wrong about securitization? Or do you agree with him?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
4-30-2008 @ 1:43PM
Chris said...
I don't think securitization is really the problem. I think the capitalization requirements for banks is really the problem. If people buy a security that is risky, and they lose money, so what? But when the lose money that they borrowed and can't repay it, then you have what we have today. If institutions only have to have, what, $8 in capital for every $100 of debt, then how can they whether a loss on risky investments.
Of course, many people priced the risk wrong, but if we make people pay for their mistakes instead of bailing them out, they'll probably be a lot smarter about how they do it next time and the market overall will be much healthier.
So, I say that the problem isn't the securitization model, but the capitalization requirements.
Chris