The global economy is imperiled because of toxic waste. But what exactly is that? Simply put, it's securities backed by loans backed by assets like houses, shopping malls, office buildings, and credit card debt. Just jam 4,000 mortgages into a trust, pay a credit rating agency to wrap them in a AAA coating, find an investor hungry for higher yield at low risk -- and voila! You've created a vampire that sucks the blood out of the global financial system.
How so? Because what I've just described is securitization -- and the $13 trillion in mortgage-backed securities (MBSs) and collateralized debt obligations (CDSs) that remains on banks' books and in institutional investment portfolios has lost much of its value. $12.8 trillion in taxpayer money has gone to try to prop up the financial system as a result.
That's why it would seem to me that we ought to end securitization. So is that what the U.S. is doing about securitization? Of course not! Instead, it's spending $1 trillion of taxpayer money on Term Asset-Backed Securities Loan Facility (TALF) -- a way to revive a market which is practically dead right now -- having dropped from $906 billion in 2006 to $152 billion in 2008. 2009 deal volume? $16 billion. TALF would lend $1 trillion to investors so they'd start investing again in these securities.
The good news is that TALF is not drawing much interest from investors. And those investors are showing their good sense -- if they make profits, Congress might tax them away. And more importantly, given the weakness of the economy, the chances that people would be able to qualify for, let alone pay back the loans going into the securitization pools are slim to none.
Even if TALF could entice investors to buy asset-backed securities, it seems pretty obvious to me that their premise is flawed. Which premise? The idea that you can mix high quality loans and poor quality loans together and the risks will be easy to forecast and far lower than the returns. Securitization is like a cloning experiment gone haywire -- yielding an unstoppable financial vampire.
We should not be trying to revive it -- we should take this opportunity to plunge a spike into its faintly beating heart.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
4-10-2009 @ 9:30AM
JCH said...
Securitization did not cause this. If anything, the big banks are the victims. Main Street ripped them off for trillions.
Local home builders got paid in full.
Local realtors got paid in full.
Local loan originators got paid in full.
Wall Street did not get paid back.