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Jan 2008 onwards

[This page lists news and developments in global securitisation markets - please do visit this page regularly as it is updated almost on a daily basis. Join our mailing list for regular news fed direct into your mailbox]


Read on for chronological listing of events, most recent on top:

See the latest news for 2009 here

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Mega US financial restructuring Bill mandates risk retention in securitizations

This is how lawmakers commonly react – to make up for lapses in shutting the door, they install a new door. In this case, they have put up several doors. In a massive exercise of lawmaking, the US draftsmen have presented a 1279 page bill that seeks to enact provisions in several of the sensitive areas of the recent crisis. It proposes a Financial Services Oversight Council, Office of Thrift Supervision be abolished and its functions be merged with those of Office of Comptroller of Currency, OTC derivatives to go through clearing houses and be traded on exchanges where possible, ‘stress tests’ and ‘living wills’ for risk firms and more. 

Specific to securitization, the Bill proposes a new Credit Risk Retention Act that primarily, as the name suggests, mandates retention of credit risk in securitization transactions. The 5% minimum risk retention that has been the central theme of regulatory discussions all over the world of last finds a place in the Bill as well, but with flexibility that permits appropriate regulatory authority to either reduce the minimum risk retention requirements in case of fully amortising loans, or in cases where the purchaser of the loans specifically negotiates for a first loss position. Such purchaser of first loss position must, however, provide due diligence on all individual loans covered in the pool. 

The standards subject to which the rules of risk retention will be framed would aim at improving underwriting standards, and encourage appropriate risk management by creditors. 

The above requirements apply in case of “asset backed securities”. The definition of the term “asset backed securities” has been imported from Regulation AB. As it stands today, the term “asset backed securities” includes only those securities that are serviced primarily from cashflows of defined assets. Hence, the term will not include any covered bonds, and will not include any synthetic securities as well. 

A new provision empowers the SEC to enact provisions pertaining to representations and warranties in case of securitization transactions.  

There are studies proposed about risk retention, and macro-economic impact of securitization transactions. 

Links: See the Text of the Bill here; Read our news on the similar provisions by EU here 

[Reported by: Vinod Kothari]

UK financial regulators propose amendments to capital regulations

12 December, 2009:  UK’s Financial Services Authority has issued a Consultation Paper on several far reaching amendments to Capital Requirements Directives (CRD). Consultation on the Paper will end on 10th March 2010, and the amendments will finally become effective 2011. 

The 360-page document contains proposed amendments relating to several areas – qualifying conditions for being part of hybrid capital, large exposures, risk management in case of securitisation, idea of a “college of supervisors” for cross-country exposures, higher capital requirements for resecuritisation, upgrading disclosure standards in case of securitisation, etc. 

The major amendments pertaining to securitisation are as follows: 

  • Firms investing in securitized products must do comprehensive due diligence. Those failing to do so with be penalized with heavy capital penalties. There is also a mandate not to invest in transactions where originator risk retention is not at least 5%. This is tune with changes proposed by the EU (see our news here) and similar changes proposed by US regulators (see our news here link).
  • In respect of resecuritisation, the FSA seeks to implement changes proposed in Basel II vide the amendments made in July 2009. This is higher risk weight, and greater chances of impairment losses.
  • Securitisation capital relief will be restricted to cases where firms can demonstrate that there is a “significant risk transfer” (SRT). Criteria are laid down in defining what is SRT. Illustratively, the originator does not hold more than 50% of mezzanine positions, or where there is no mezzanine position; originator does not hold more than 20% of senior positions, and so on. It is not clear how the requirement of SRT marry with the other requirement of originators maintaining a minimum 5% exposure, commonly understood to be 5% horizontal piece. 

Vinod Kothari comments - The securitisation market continues to remain very weak, and regulators’ approach of tackling the instrument, not the malaise, will only contribute to it. Investors will develop apprehensions of regulatory intensity in case of investments in securitized products – thereby deterring investments.

[Reported by: Vinod Kothari]

Consensus on OTC derivatives regulations

7 December, 2009: Several authorities over the past few months have been framing regulations to tame the OTC derivatives market.  The House of Agriculture Committee, the House Financial Service Committee had presented bills for regulating the OTC derivatives market and the Banking Subcommittee on Securities, Insurance and Investment, introduced the Comprehensive Derivatives Regulation Act of 2009 (See our report here). Now the House of Agriculture Committee and the House Financial Service Committee have reached an agreement on a bill to impose federal regulation for the first time on the over-the-counter derivatives market.  The OTC derivatives helps corporations, hedge against operational risks but post financial crisis the lawmakers have been wanting to tighten the regulatory noose to curb the speculative activities.

However there are two issues that are yet to be decided whether to limit ownership in swaps clearinghouses, and whether regulators would have the power to set margin and capital requirements on swaps traded by non-financial end users. The compromise bill includes that the standardized swaps will be traded on the exchange whereas there would be higher margin and capital requirement for customized swaps but registration of dealers and major market participants would be required to ensure transparency and record keeping in trading.

The bill is expected to come up for a vote on the House floor next week as part of financial regulation reform proposals. See the press release here.

[Reported by: Nidhi Bothra]

ASF official suggests Securitization regulatory reforms

American Securitization Forum’s (ASF) Executive Director, George P. Miller, delivered testimony on 7th October, 2009 at a hearing of the Senate Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance and Investment on “Securitization of Assets: Problems and Solutions.” 

Miller’s testimony sung paeans about the relevance of securitization, and lamented that since the mayhem in the financial markets, securitization has remained dormant. Lots of people have held securitization responsible for the subprime debacle, but according to Miller, the deficiencies are not inbuilt in securitization but the manner in which securitization was used by the market participants that led to the rigmarole. High leveraging caused significant increase in the demand much of which was artificial and not guided by the financing needs of the lenders and the borrowing needs of the consumer.

Miller also suggests that the policy reforms coupled with industry initiatives may help in reviving the securitization market, for a more stable environment these reforms should be coupled with integrity and reliability of securitization data and transaction structures coupled with enhanced operational risk. The reforms that Miller suggested are as below:

  • Increased Data Transparency, Disclosure and Standardization, and Improvements to the Securitization Infrastructure – ASF’s project on Residential Securitization Transparency and Reporting (“Project RESTART”) focuses on addressing the transparency and standardization deficiencies in the RMBS markets initially.
  • Required Risk Retention and Other Incentive Alignment Mechanisms – ASF supports the idea of risk retention as a means of aligning of the economic incentives of the transaction participants. However he does not rule out the possibility of having other forms of achieving effective means of alignment of interest of the transacting parties.
  • Increased Regulatory Capital Requirements and Limitations on Off-Balance Sheet Accounting – ASF believes that increase in the regulatory capital requirements should be introduced for certain securitization. Overall increase in the regulatory capital requirement may have a negative effect on the economic viability of securitization itself.
  • Credit Rating Agency Reforms – Credit rating agencies play a very important role in the securitization market and the reforms suggested to increase the quality, accuracy and integrity of credit ratings and the transparency of the ratings process are all welcomed. ASF supports the reforms for full and transparent disclosure on the basis for structure finance ratings so that the risk of securitization can be understood and differentiated from the risk presented by other types of credit instruments.

[Reported by: Nidhi Bothra]

 IMF recommends restarting securitization

IMF issued the Global Financial Stability Report on 21st September, 2009, which would give the securitization market and the industry analysts a reason to cheer. The chapter 2 of the report on ‘Restarting Securitization Markets: Policy Proposals and Pitfalls’ summarizes the rise and fall in the securitization market, analyses the recommendations made so far for the revival of the securitization market and lays emphasis that restarting of the securitization markets would be important for financial stability globally.

The Chapter brings out the flaws of the market before crisis that ultimately led to the debacle. Banks started holding the least risky tranches, originated by other banks including the sub prime exposure which reduced the risk dispersion that led to the market fallout. The report also talks about the ‘alphabet soup’ where demand for various structured products was instigated by the rating agencies willingness to give away their highest ratings coupled with the investors dependence on the ratings provided to these securities and inadequate information to assess or adjudge the ratings. The numbers prove the flaw where the report says that of all the ABS CDO tranches issued from 2005 to 2007 that were originally rated AAA, only 10 percent are still rated AAA by Standard & Poor’s, and almost 60 percent are rated single-B or less, well below the BBB-investment-grade threshold.

The report also recognizes that though most people were talking about what went wrong it was imperative to revive ‘sound securitization.’ The report stresses that the restarting private label securitization is vital to end the financial crisis. The report welcomes the changes brought with regard to securitization and presents its recommendations on implementation of the suggestive changes. Some of the recommendations are as below:

  • Credit Rating Agencies: Chapter 2 says that so far the investors had placed too much of reliance on the credit rating provided to the securitized products and under the issuer pay model, interest of the investors were ignored. The report recommends that as credit rating agencies have a vital role in the securitization process, elimination of the issuer-pay models, disclosing preliminary ratings to reduce ‘rating shopping,’ publishing performance data to enhance due diligence and competition among credit rating agencies be increased
  • Retention of risk by the originators: The report says that these requirements adopted by both US and European authorities should not be standardized. For diligent loan underwriting and monitoring, the report welcomes that there should be more “skin in the game” but the report says that the requirement should not be standardized and both size and the form of retention should be more flexible to achieve the broad based incentive alignment. The flexibility could be brought about by basing the retention policy on type and quality of the underlying assets, the structure of the securities, and expected economic conditions
  • Changes in the accounting standards and regulatory requirements: The report recommends that disclosure and transparency standards should be improved. Accounting standard changes brought in by FASB on elimination of gain on sale accounting treatment was welcomed by the report as it meant disclosure of income as and when received and not upfront, but the report also cautioned that the changes in the disclosure requirements should not be such that would burden the securitizers and investors. Loopholes of the Basel II regulatory capital requirement should be plugged too.
  • Standardization of the securitized products: To avoid problems relating to valuation and risk analysis the securitized products should be simplified and standardised. The report also mentions that some of the complex products like CDO2 should not re-emerge.
  • Covered Bonds: Covered Bonds are viewed as an alternative to risk retention policy adopted by both EU and US, but the report views covered bonds as a complementary form of capital market based funding and not as an alternative to securitization.

While the report is appreciative of the recent changes brought about but also state that if new rules are not implemented well it could have its side effects on the market and would slow down the market rather than reviving it, thereby defeating the purpose. The new regulations should not throttle the markets but should facilitate maintaining a firm ground and sustainable growth.

In times where securitization is looked upon as a taboo or a jinx of sorts, the report gives securitization its due.

[Reported by: Nidhi Bothra]

Yet another credit crisis ruling: Morgan Stanley, Rating agencies defence in SIV Cheyne compensation claim dismissed

It is the same story everywhere – when the Stamford court was ordering UBS (see the news item here) to set aside money for damages to Pursuit for selling CDO notes, SDNY judge Shira A. Scheindlin was writing order denying rating agencies’ and Morgan Stanley’s motion to dismiss investors’ claims for losses in structured investment vehicle (SIV).  

The suit, brought by Abu Dhabi Commercial Bank, charged the defendants for misrepresentation, fraud, breach of fiduciary duty, negligence, etc. Morgan Stanley and the rating agencies had filed a motion for dismissal on various grounds.  

Cheyne Finance Plc was a structured investment vehicle that is now in bankruptcy. Cheyne issued 3 types of notes – commercial paper, medium term notes, and mezzanine capital notes, all of which were rated by the rating agencies. This is the common structure of SIVs.  

The case brings to public light the role of rating agencies in structured vehicles such as SIVs. The rating agencies charged upwards of 10 basis points of the capital of the SIVs as their initial fees, and charged $ 1.2 million + 0.055% of the market value of the SIV’s assets. This means the rating agencies continued to gain as the SIVs continued to build more assets. Also, there is a startling fact that the rating agencies in case of SIVs get their fees only if the notes get the AAA ratings. The rating agencies claimed that their opinions are non-actionable – this argument was rejected by the court. “Rating agencies’ opinions are not mere opinions but actionable misrepresentations”, held the Judge. 

In summer of 2007, Cheyne SIV collapsed. In August 2007, it declared bankruptcy.  

The factual analysis reveals that while the SIV was required to limit its exposure to RMBS to 55%, Morgan Stanley and rating agencies were well aware that the actual investment was well above 55%. The SIV held New Century’s debt, and Morgan Stanley, as New Century’s 4th largest creditor, was aware of facts about New Century that were not in public domain.  The structure of the fees for the rating agencies created a conflict of interest as they were directly connected with the success of the vehicle and its size of assets. “Where both the Rating Agencies and Morgan Stanley knew the ratings were flawed, knew that the portfolio was not safe, stable investment, and knew that the Rating Agencies could not issue an objective rating because of the effect it would have on their compensation, it may be plausibly inferred that Morgan Stanley and Rating Agencies were disseminating false and misleading ratings.” 

[Reported by: Vinod Kothari]

Links: Text of the SDNY ruling is here:

For more on SIVs, see Vinod Kothari’s presentation here:

CDO investors continue to crowd courts: UBS charged for selling "crap" to Connecticut Hedge Funds

This is only one of the several rulings either already out of the legal press, or under publication. Law courts all over the US and some even in Europe are currently considering CDO/ MBS/ ABS investors’ claims as to fraud, mis-selling, misrepresentations and so on. In a ruling dated 8th Sept 2009, Justice Blawie of the Stamford’s  Superior Court ordered UBS to set aside money for pre-judgment damages, or face garnishee orders for recovery. 

In this case  brought by Pursuit Partners, a Connecticut-based hedge fund, UBS was charged for selling CDO tranches that were described in internal emails as “crap” and “vomit”, and were sold shortly before Moody’s downgraded the securities. All the CDOs were so-called bespoke CDOs structured to meet Pursuit’s needs of a triggerless, investment-grade piece that could be available at significant discount on face value. 

Moody’s and S&P have also been charged in the case, as there were allegations that UBS was privy to forthcoming changes in the rating methodology of Moody’s whereby the notes that were sold to Pursuit would cease to be investment grade. The change in methodology was the correlation assumption in CDO pools. 

The offer document, as is quite usual with transactions, said the transaction will be governed by New York law. However, the Connecticut court still assumed jurisdiction, ignoring the choice of law clause, on the ground that a choice of law by parties can  be ignored on ground of public policy. The Judge said: “To allow securities to be marketed, offered and sold in any or all of the 49 states outside of New York, and hold that no other jurisdiction’s laws can be enforced or invoked, or that Connecticut law must be ignored, even if a plaintiff can establish, as it has here, probable cause to support a cause of action under Connecticut law, the state where the solicitation was made, simply because of this choice of law provision, is not a proposition this court will or may accept, both as a matter of statute and public policy”. If this ruling is finally accepted at higher forums, then CDO marketers would have a real tough time defending suits all over the country. 

The notes were sold to Pursuit between 26th July 2007 and Oct 1, 2007. This was the beginning of the avalanche of CDO downgrades. Obvious enough, UBS would have sensed the impending downgrades, and therefore, internal emails of UBS indicated the need to clear the inventory of CDO tranches that UBS was carrying. This evidence led the court to find “probable cause to sustain the claim that UBS sold the Notes to Pursuit without disclosing the following material non-public information: (1) that the Notes would soon no longer carry an investment grade rating, as the ratings agencies intended to withdraw these ratings as a result of a change in methodology; and (2) that once the investment grade rating was withdrawn, the CDO Notes sold by UBS to Pursuit, being valued in the tens of millions of dollars, would thereby become worthless”. 

The court on analysis of facts, primarily emails of the CDO marketing team of UBS, that UBS was in superior knowledge of the facts, which were concealed from the buyer, which the buyer relied upon and was thus unduly affected by the representations of the seller.  Internal emails of UBS said they had sold more “crap” to Pursuit, etc., which led the court to apply the “superior knowledge” doctrine. The court noted that risk is something that attaches to all such investments. However, (t)hat is the difference between a risk that something might happen to change the value of an investment, which is both a fact of life and a risk shared by all parties to any securities transaction, and the undisclosed knowledge that something will happen. That type of nondisclosure, whether it is on the part of a seller or a buyer, can cross the line into actionable securities fraud, and the court finds probable cause to sustain a finding that it this instance, it did”. 

Vinod Kothari comments: The ruling above is a flavor of the times. Judges, like the financial press, common people and others, have been affected by the wave of sentiment that goes against people who marketed and sold CDOs. On objective analysis of the ruling above, the question to be asked is – if UBS sold crap to Pursuit, what else do you sell to someone who comes to buy crap? Pursuit wanted to buy investment grade, being sold at steep discount on face value. Which investment grade notes would sell at steep discount on face value, given the high return on face value itself that they carry? The notes in question were bought between July and October, 2007 when the subprime crisis had already started surfacing. Bear Stearns’ hedge funds had already imploded by then. Rating agencies had also started downgrading several CDOs. On our website here, on June 20, 2007, we had reported that securitisation market was looking like a sinking ship, and there was fire everywhere. The purchases were made by Pursuit in tranches upto 1 October, 2007, by which time the subprime story, and the impact of that on CDOs was spread all over the financial press. So, can Pursuit really contend that there was a “superior knowledge” that UBS had, which Pursuit could have had? Pursuit, as a matter of investment strategy, might have projected that that was the right time to buy CDOs at deep discount, as its investment team might have projected that the crsis will not last long. 

Offer documents contained a detailed description of what were the assets of the pools, and what risks they carried. The impending change in rating methodology of Moody’s was  in public domain as rating agencies had come up with public statements on the same. Pursuit has affirmed before the court that it had read the offer documents and understood the same. A hedge fund is not a lay investor – its sole USP lies in being able to make money by taking risks that lay investors do not or cannot take.  

If this ruling leads UBS to pay damages for the losses that Pursuit faced, almost every seller who sold bonds that went bad would, sooner or later.

[Reported by: Vinod Kothari]

 Insurance Securitisation important and growing: IAIS Report

International Association of Insurance Supervisors (IAIS) published its report on ‘Developments in (Re)Insurance Securitization’ on 26th August, 2009. The report recognizes insurance securitisation as a significant complement to traditional reinsurance: the market, though small, is growing at a discernible pace.

Insurance securitisation is used by property and casualty companies for seeking reinsurance capacity, and life insurance companies for seeking regulatory capital by embedded value encashment, or extreme mortality risk transfer.

The aggregate market for insurance linked securities (ILS) peaked up in 2007 with an issuance of $ 15.5 billion, including $ 7.6 billion of life, and 7.9 billion of non-life issuance. The market in 2008 was quite slow – due to a global retraction of investors from anything that was new or complex. 2009 so far has seen only some extent of activity. Volume is not the only indicator of the maturity of the market – there are several other parameters noted in the Report – including width of sponsors, nature of perils covered, maturity of transactions, and so on.

The Report notes the regulatory developments in various jurisdictions too – including laws related to special purpose reinsurance vehicles, subordination of investors’ claims to the cedants, and so on.

The Report notes examples of ILS that have gone under stress over time. The first bond that suffered losses was Georgetown Re in 1996 and the report studies the performance of various other bonds like Kamp Re and Avalon Re affected by 2005 USA hurricane season, Newton Re, Orkney Re and others affected by the current financial crisis. There are 4 transactions that were stressed due to the bankruptcy of Lehman as a counterparty.

The IAIS Standards and Guidance paper on reinsurance is to include the guidance on insurance securitization as well and is expected to be finalized in 2011.

Report says that the insurance securitization market remains largely untested but shall grow in the times to come, taking cues from the report the market is all geared up to tap the resources that went undermined so far.

[Reported by: Vinod Kothari]

Link: See the full text of the report here

Link: See our risksec page

Workshops: Vinod Kothari offers workshops on insurance securitization. For sample course outline of a workshop offered in Milan recently, see here 

IOSCO recommends securitisation and CDS regulations

The International Organisation of Securities Commissions’ (IOSCO) has published the ‘Unregulated Financial Markets and Products – Final Report’ prepared by the Task Force on Unregulated Financial Markets and Products  on the 4th of September, 2009. The Task Force had earlier, in May published its consultative report on the issue (see our news here

The Final Report recommends the regulatory actions to improve the transparency and oversight of the securitization and credit default swaps (CDS) markets.  

As regards securitisation, IOSCO’s recommendations are not lot different from what regulations in the EU and US have proposed - alignment of incentive in the securitization value chain, essentially implying retention of originator stakes in securitized poolsCDS issues relate to counterparty risk, operational risk and market transparency.  

The main securitisation-related recommendations are: 

  1. Consider requiring originators and/or sponsors to retain a long-term economic exposure to the securitisation in order to appropriately align interests in the securitisation value chain;
  2. Require enhanced transparency through disclosure by issuers to investors of all verification and risk assurance practices that have been performed or undertaken by the underwriter, sponsor, and/or originator;
  3. Require independence of service providers engaged by, or on behalf of, an issuer, where an opinion or service provided by a service provider may influence an investor's decision to acquire a securitised product; and
  4. Require service providers and/or issuers to maintain the currency of reports, where appropriate, over the life of the securitised product.  

The main CDS recommendations are: 

  1. Provide sufficient regulatory structure, where relevant, for the establishment of CCPs to clear standardised CDS, including requirements to ensure:

a.       appropriate financial resources and risk management practices to minimise risk of CCP failure;

b.      CCPs make available transaction and market information that would inform the market and regulators; and

c.       cooperation with regulators;

  1. Encourage financial institutions and market participants to work on standardising CDS contracts to facilitate CCP clearing;
  2. The CPSS-IOSCO Recommendations for Central Counterparties should be updated and take into account issues arising from the central clearing of CDS;
  3. Facilitate appropriate and timely disclosure of CDS data relating to price, volume and open-interest by market participants, electronic trading platforms, data providers and data warehouses;
  4. Support efforts to facilitate information sharing and regulatory cooperation between IOSCO members and other supervisory bodies in relation to CDS market information and regulation; and
  5. Encourage market participants' engagement in industry initiatives for operational efficiencies.  

[Reported by: Nidhi Bothra]

Links – for text of the IOSCO report, see here

Yet another shock to bankruptcy remoteness

UK Chancery Court temporarily defends attack by Lehman’s counsels

Vinod Kothari

We have always contended that the concept of bankruptcy remoteness is a product of good times, and has not been tested in bad times such as these.

The latest in the series of shocks to bankruptcy remote vehicles is the contention of the counsels for Lehman before the UK Chancery Court in Perpetual Trustee Co. Ltd  v. BNY Corporate Trustee Services Ltd [2009] EWHC 1912 (Ch).

Transaction structure

The case pertains to a multi-issuer synthetic CDO program called Dante Program. The structure is the familiar synthetic CDO structure, wherein several Irish SPVs, in this case, Saphir Finance Public Limited Company, Zircon Finance Ltd and Beryl Finance Ltd, would issue notes to the investors and raise funding. The funding would be in government bonds or other secured investments (Collateral). The SPVs would enter into a swap (perhaps a credit default swap, or total rate of return swap) under which Lehman Brothers Special Financing (LBSF) would make periodic payments to the issuing SPV, which, in turn, would pay the coupon to investors in the notes.  The Collateral would be charged, first, in favour of LBSF as the swap counterparty, and thereafter, in favour of the investors of various classes in descending order of priority. The collateral trustee in the present case is BNY Corporate Trustee Services, and Perpetual and Belmont (Note Trustees) were the trustee for the noteholders based out of Australia, New Zealand and Papua New Guinea.

As Lehman filed for bankruptcy, the payments under the swap were not made. Hence, the swap payments were defaulted post 15th Sept 2008. Pursuant to this, the Note Trustees filed a claim against the Trustee, for realization of the collateral, as an event of default under the swap agreement had taken place. The terms of issue provided that the noteholders would have a priority over the swap counterparty, if an event of default on the part of the swap counterparty had occurred.

Contentions of LBSF counsel

LBSF denied the claim of the noteholders, taking shelter under sections 362(a)(3), 365(e)(1) and 541(c)(1)(B) of the US Bankruptcy Code. They also contended that the action of the Note Trustees be stayed until resolution of the matter by the Bankruptcy Court in the Southern District of New York (SDNY) where Lehman’s bankruptcy proceedings are going on. Section 362 of the US Bankruptcy Court provides for automatic stay on proceedings against the property of an entity after a bankruptcy petition has been filed. The section marks a significant difference between US and UK insolvency laws – the latter do not have a provision for automatic stay against creditors or security interest holders. Section 365 allows a bankruptcy trustee to disown onerous clauses in contracts of the bankrupt.

In essence, the Note Trustee pleaded that as an event of default had occurred, the interest of the noteholders overtook priority over that of LBSF, while on behalf of LBSF, it was pleaded that LBSF could take shelter under benevolent provisions of the US Bankruptcy code and prevent the subordination of LBSF.

LBSF has filed a motion in the SDNY Bankruptcy court which was due to come for hearing on 5th August 2009. Text of the motion is available here.

Contracting out of bankruptcy law?

The arguments in this case tread over a very significant topic in bankruptcy laws – is it possible for contractual clauses to override bankruptcy laws? In other words, can parties contract out of bankruptcy laws? For instance, bankruptcy laws provide for a particular manner of priority in distribution of the estate of a bankrupt. Could parties have provided by contract for a different order? The most logical answer would have been no, because if that was the case, bankruptcy laws would lose their meaning. But then bankruptcy proofing that structured finance transactions seek to attain, is actually, in a manner of speaking, contracting out of  bankruptcy laws.

Counsel for LBSF pleaded that a clause in the swap documents was void under English law. The clause (Clause 5.5 of the Supplemental Trust Deed) provided that the Collateral would be held by the trustee with first priority to the swap counterparty, unless the swap counterparty had committed an event of default.  Note that this clause is most usual clause in any synthetic CDO issuance, and is most logical and easily understandable. The CDO issuing SPV has obligations on account of the protection it sells to the swap counterparty, and obligation to pay interest and principal to the noteholders. The idea of holding the collateral with the SPV is that any protection sold by an SPV has no meaning unless it is backed by assets – therefore, the SPV backs the protection it sells to the swap counterparty with the collateral. The collateral will continue to enure  for the benefit of the swap counterparty, but if the swap counterparty has defaulted under the terms of the swap, the swap gets cancelled, and the collateral flows back to the investors. If this was not the case, the investors have no support of the collateral at all, and the investors have taken the risk of bankruptcy of the swap counterparty, whereas the very idea of interposing an SPV between the swap counterparty and the investors is that the investors remain immune from the bankruptcy risk of the swap counterparty.

In essence, what the counsels for LBSF were pleading was both against concept of bankruptcy remoteness and against common intuition. The counsels relied upon a ruling in Money Markets International Stockbrokers Ltd v London Stock Exchange Ltd [2002] 1 WLR 1150. wherein a UK court had held that if a clause in a contract provides for deprivation of the property of someone upon bankruptcy, such a clause is invalid. In that case, the court had held: “There cannot be a valid contract that a man's property shall remain his until bankruptcy, and on the happening of that event go over to someone else, and be taken from his creditors.”

The ruling, for most part, has dwelt upon the breadth of the above principle in Money Markets International Stockbrokers Ltd v London Stock Exchange Ltd. The counsel for the Note Trustees contended that if this principle was to be applied widely, it would frustrate myriad contracts in the commercial world, many of which contain re-alignment of priorities in the event of default of a party to the contract.

LBSF counsel relied upon an old English ruling in Ex parte Mackay (1873) LR 8 Ch App 643, wherein it had been held that “in my opinion a man is not allowed … to provide for a different distribution of his effects in the event of bankruptcy from that which the law provides. It appears to me that this is a clear attempt to evade the operation of the bankruptcy laws”.

LBSF counsel also cited from other English rulings. For instance,  Ex parte Jay (1880) 14 Ch D 19, holding as follows: “"a simple stipulation that, upon a man's becoming bankrupt, that which was his property up to the date of the bankruptcy should go over to someone else and be taken away from his creditors, is void as being a violation of the policy of the bankrupt law.”

The Chancery court, however, dismissed the arguments. The Chancellor held:

“In my view clause 5.5 of the Supplemental Trust Deeds is not contrary to public policy on the grounds relied on or at all. I reach that conclusion for a number of reasons. First it is necessary to consider the structure of the transaction as a whole, not the terms of clause 5.5 of the Supplemental Trust Deed in isolation. The security conferred by that clause is in respect of the collateral. The collateral was bought by the issuer with the money subscribed by the investors for the notes. In no sense was it derived directly or indirectly from Lehman BSF as the swap counterparty. Second, on general principles the court should not be astute to interpret commercial transactions so as to invalidate them, particularly when, as counsel for Belmont suggested, consequential doubt might be cast on other long-standing commercial arrangements. Third, the involvement of Lehman BSF is the consequence of the swap agreement under which it sought and obtained, in effect, credit insurance in respect of the Reference Entities. As long as that agreement was being performed it was appropriate for Lehman BSF to have security for the obligations of the issuer as the other party to the swap agreement in priority to security in respect of the issuer's obligations to the noteholders under the trust deeds and the terms and conditions of the notes. It is plain that the intention of all parties was that the priority afforded to Lehman BSF was conditional on Lehman BSF continuing to perform the swap agreement. Fourth, so regarded, the priority of Lehman BSF never extended to a time after the event of default in respect of which it was the defaulting party had occurred. Fifth, it follows that such beneficial interest by way of security as Lehman BSF had in the collateral was, as to its priority, always limited and conditional. As such it never could have passed to a liquidator or trustee in bankruptcy free from those limitations and conditions as to its priority”.

The reasons cited by the judge are most significant and appreciable. The collateral was sitting in the transaction to provide asset backing to both the investors and the swap counterparty. The swap counterparty was provided seniority during the performance of the payments by the swap counterparty. But obviously, the swap counterparty cannot contend that even if fails to make the swap payments, it must still continue to enjoy the collateral. The shifting of priorities is critical to the very nature of the transaction, which is to provide protection against bankruptcy of the swap counterparty. If the swap counterparty still has superior rights over the collateral despite  bankruptcy, there is no bankruptcy remoteness at all. What the counsels for LBSF were claiming would, if approved by the courts, terminate the whole concept of bankruptcy remoteness.

The present case was adjourned, in view of the pending proceedings in SDNY bankruptcy court. This was done in pursuance of the protocol under UNCITRAL’s model law on cross border insolvency.

Subsequent to the ruling of the Chancery court, the counsels for LBSF have applied to the US bankruptcy court to appoint LBSF as representative of the bankrupt’s estate and to seek the assistance of a foreign court in protecting the property of the bankruptcy.

It would be interesting to watch out for further developments in the case as this case would be one out of many where, post-credit-crisis, the concept of bankruptcy remoteness will face the tough test that it has been escaping all this while.

Important links:

See the Ruling of the Chancery court, Dated August 7, 2009

To know more about Special Purpose Vehicles see our page on SPVs here.

Department of Treasury proposes regulations for securitization and CDS transactions

It is always like this – things go wrong because of natural process of sheer over-exuberance, and we react with more rules and more regulations, as if it was lack of rules that caused the problem. Not unexpected at all, the Department of Treasury issued an 89 page report proposing several new regulations in the financial market. 

As for securitization transactions, it proposes originators to be mandated to keep at least 5% risk in the securitized portfolios – similar to what European counterparts have already imposed (See our news here). Recognition of upfront gain on sale should be eliminated, and off balance sheet treatment should be ruled out (see FASB’s new standards).  Originators should have fees or incentives based on actual performance of the pool. Originators should give representations and warranties as to performance of the pool – something which is today seen as violating the true sale condition. In short, the true sale business is clearly frowned upon in the report.  

SEC should continue its effort to regulate credit rating agencies. Ratings to structured products should be distinguished from other products – something which technically takes away the very comparability of ratings. Surprisingly, the report also says the regulators should reduce dependence on ratings for risk weights, and should think of different risk weights for structured and unstructured products. 

On credit derivatives, the Report has comprehensive regulation on all OTC derivatives, including credit derivatives. Clearing of all standard OTC derivatives should be required through centralized counterparties. [Reported by : Vinod Kothari] 

For full text of report, see here.

Over with off balance sheet securitization - FASB issues new standards on securitization accounting

As expected, last Friday, 12th June 2009, FASB issued new accounting standards (FAS 166 and FAS 167) that bring about very significant changes to the way securitization transactions have been accounted for under the US GAAPs. The IASB had already put up exposure drafts on the issue (see our news here). As (a) the new rules require that where there is continuing involvement of an originator in a securitization transaction, off balance sheet treatment will not be granted; and (b) continuing involvement is a reality with most securitization transactions world-over, it is almost clear that either securitization transactions will not be put off the books at all, or even they are put off the books, they will get consolidated back under the new consolidation regime. In essence, bye-bye off-balance sheet securitization.

The new regime may usher in a completely new thinking on bankruptcy-remoteness and ratings arbitrage. New devices of credit enhancement will be searched. Of course, there always will be asset-backed funding and asset-backed investing, but existing system of achieving isolation by a true sale would possibly get a hard re-look.

The new standards will be effective for accounting periods beginning after 15th Nov 2009. [Reported by : Vinod Kothari]

Links: For details of changes brought about by FAS 166 and FAS 167, see our page here

FASB's proposed changes to bring US GAAP securitization accounting close to IFRS

On 18th May 2008, the FASB concluded its deliberations on several crucial amendments to securitization-related accounting standards. Both FAS 140 and FIN 46R are slated to be amended. 

The proposed amendments to FIN 46R add a qualitative test to the criteria for consolidation of variable interest entities (VIEs). VIEs are special purpose entities – they are normally not controlled by their legal owners but by another entity or entities that hold the risks/returns of the entity (which is referred to as variable interest) either by holding a residual interest in the entity or by being exposed to variability in losses. Existing conditions for consolidation of VIEs are quantitative – holding majority of variable interest. The proposed changes add a subjective, qualitative test of “control” also to the consolidation criteria. That is, if the VIE is controlled by a particular entity, the controlling entity will consolidate the VIE. 

It is not usual for US GAAPs to have subjective tests such as control as the basis for consolidation – as US standard writers have mostly relied upon more specific “rules” than principles.  

The second package of changes will amend securitization accounting standard FAS 140.  

First of all, quite significantly, the existing exemption for qualifying special purpose vehicles (QSPEs) from FIN 46R will go away as the very concept of QSPEs is intended to be done away with. Existing rules provide an exemption to QSPEs from consolidation under FIN 46R, with the result that most RMBS and ABS SPEs that can qualify as QSPEs remain free from consolidation requirements. Now that the exemption will be removed, the position of US GAAPs on SPE consolidation will be similar to that of IFRS, where SIC 12 requires consolidation of most SPEs. Since the basis of consolidation is variable interest, it is almost unlikely that SPEs will not have someone holding majority of variable interest: hence, every SPE will require consolidation with someone or the other. The net result may be that off-balance sheet treatment for securitization may be effective over – a position that we have predicted will apply under IFRS as well.

Another change is to require that de-recognition standard will apply to a fraction of a financial asset only if such fraction is fully proportionate share of a financial asset. This is the position under IAS 39 currently: FAS 140 as it exists does have the possibility of elements of financial assets being taken as assets by themselves. 

Additional disclosures are going to be required for “continuing involvement” in securitization transactions. Notably, proposed changes in IAS 39 seek to deny off balance sheet treatment in case of continuing involvement. [Reported by: Vinod Kothari]

Links: see our page on accounting for securitization here.

General Growth CMBS SPEs file for bankruptcy: One more nail in the coffin of securitization

We have been contending on this site that the myth of special purpose vehicles, as entities with peppercorn capital and isolated from the originators with capital held by charities claiming to do the good of mankind, is all a legal superstition and is a product of good times. The presumption of bankruptcy remoteness is  valid only as long as any of the parties is not in bankruptcy. It is not that there have not been challenges to true sale before, but this one taking 166 SPVs for CMBS transactions into bankruptcy may be quite a big jolt. The worst part is that this may be a temptation for more such attempts by transactions facing rough weather.

In the present case, General Growth Properties Inc., a leading CMBS issuer in the US, filed for Chapter 11 protection last month, and also took 166 of SPVs for various CMBS transactions into bankruptcy. Since a bankruptcy filing would have been based on vote of directors, and SPVs typically do not have substantial originator presence on their boards, legal circles have a feeling that the originator strategically changed the composition of board of directors of each of the SPVs to introduce “convenient” who ultimately voted for the bankruptcy filing.

The bankruptcy filing has obviously rattled the securitization investors, not just in this transactions, but the entire market.

General Growth is the single largest CMBS borrower in the U.S. The CMBS market has grown up over the past two decades and was continuing  growing, until 2008, when securitization markets in general sank.

Reported by: Vinod Kothari

Links : see SPV pagetrue sale page 

European Parliament adopts new capital rules for banks

The Legislative Report amending the capital requirements for banks to improve transparency and supervision of the financial systems and to avoid future financial crisis was adopted in the Parliament with 454 votes in favor and 106 votes against the motion. The European Parliament, Council of Ministers and the European Commission delegations agreed to have the new legislation approved before the end of the current legislative term. The ‘Capital Requirements’ Directives, sought revision of the previous directives to improve crisis and risk management. The few notable points of the new legislation are:

  • Council to establish the colleges of supervisors to facilitate cooperation among national authorities dealing with cross-border financial institutions
  • The banks could not expose more than 25% of its own funds to a client or group of clients. The exception to this threshold limit will be exposure between credit institutions but capped to not more that Euro 150 million. This limit on the exposure will be subject to review by the end of 2011
  • In case of securitization the legislation mentions that a retention of 5% of the total value of the securitized exposure to be retained by the issuing institution, ensuring material interest in the performance of the proposed investments. This again was subject to review by the end of 2009.
  • With respect to Credit Default Swaps as well, there was a need felt for stricter regulations to bring about transparency in trade and to set up a central clearing house to be supervised by the European Union to reduce the risk of these instruments. The legislative proposal in this regard is to be out forth by the Commission by the end of 2009

The European Legislation, Councils of Ministers and the European Commission agreed on the insertion of the review clause and also to increase the retention rate by 31st December, 2009 after consulting the Committee of European Banking Supervisors. These legislations are to be complied with by the end of the year 2010. This is just a step in response to the present financial crisis. EU in the last month had also approved of the new rules for the Credit Rating Agencies (see report below) in a similar effort to improve transparency and to gain investors’ confidence.

Reported by: Nidhi Bothra

IOSCO recommends regulations of securitisation and credit-derivatives

The International Organisation for Securities Commissions’ (IOSCO) Technical Committee published a report on ‘Unregulated Financial Markets and Products - Consultation Report prepared by its task force.

Thankfully, in a period when lot of commentators are spitting venom at securitization as being the source of the present crisis, the Report recognizes the significance of securitization. “The absence of a well-functioning securitisation market will impact consumers, banks, issuers and investors. The price of credit is likely to be higher for the consumer and the availability scarcer. Banks will no longer have a tool to reduce risk and diversify their financing sources”, says the Report.  Credit default swaps, too, can serve as an excellent instrument for risk hedging and price discovery, but also have a potential to proliferate as a tool of speculative trading in credit.

Thus, the interim recommendations are aimed towards restoring transparency and investors’ confidence, promoting fairness and bringing about stability in the international financial markets. The interim recommendations on securitization include:

  • The originators or the sponsors to have longer term economic interest in the securitization transaction
  • Disclosures and the transparency norms to be made stringent to ensure that appropriate checks and assessments are done and the originator, issuer and underwriters have duly performed their duties.
  • Improving disclosure norms for the issuers on initial and continuing basis, giving out data on the underlying asset pool’s performance and so on.
  • Independence of experts used by issuers

In the CDS market, the task force recommended the formation of central counterparties to handle clearing of CDS contracts and for market participants to support the clearing process by developing a standardised CDS contract. The report is open for comments till the 15th June, 2009. See the full text of the report here.

Links: See news updates on credit derivatives here

Reported by: Nidhi Bothra  

Chase's $5 billion swells TALF ABS issuance to $11 billion for May

Since the launch of the TALF program in March the issuers have sold $11.4 billion of securities mostly backed by credit card and auto loans. Now with the Chase Issuance Trust coming up with a $5 billion ABS deal in the third round of TALF program; the supply figures come to a $9.5 billion in May alone. The Federal Reserves says that the investors have requested $10.6 billion worth of loans as against $ 4.7 billion in March and $ 1.7 billion in April round.

The Chase AAA rated securities are of 3 years maturity and are priced at 155 basis points over one month LIBOR rate. The other deals that will qualify for TALF financing in the month of May are a $760 million equipment loan deal from Case-New Holland (CNH), $500 million offering backed by motorcycle loans from Harley-Davidson, a $1.75 billion issue by Volkswagen and a $1.75 billion of auto ABS by Honda Auto, so the number of TALF eligible auto deals has come to a total of four. Apart from Volkswagen and Honda, Mitsubishi, Harley-Davidson also eyeing the market. A $1 billion offering of credit card securities from GE Credit sold at 210 basis points over one month LIBOR rate. So the TALF eligible new issuances stand at $11 billion for the month of May. There are reports of a $3.6 billion Sallie Mae deal materializing as well.

After a positive start and a disappointing dip in the issues in March and April respectively the third round has brought in strong sentiments of confidence as the issues are met with high demand for the securities and are oversubscribed. There are definite signs of revival of the securitization market.

Reported by: Nidhi Bothra

Is Securitization Islamic? IIFA to clear ambiguity

Is securitisation Islamic? There is controversy lingering on securitization where various scholars and schools of thought are diverse on their opinion - whether the act of securitization (tawriq) is permissible from the Islamic perspective or not.

In a securitization transaction there are selected debts that are permissible for securitization. For instance credit cards loans where there is a flat fee charged (rather than it being called interest charges) and the investors are paid dividend on their investments (dividends being the principal plus fees charged from the credit card holders). Presently banks securitize without considering the interpretations of the Holy Qur’an and make offerings to the customers ignoring the text that bans various provisions so incorporated. As a result there a lot of scholars who issue fatwa based on their opinion on the securitization transaction.

The International Islamic Fiqh Academy (IIFA) constitutes eminent scholars from various parts of the world and gives their recommendations on various financial matters. The Fiqh Academy will be taking up the issue of securitization and formulate a stance on the issue from the Islamic perspective. The responsibility dawned on IIFA is to bring all the schools of thoughts closer to the understanding and interpretation of the Ummah and abiding by it while dealing with the ambiguities related to the issue.

Reported by Nidhi Bothra

Vinod Kothari comments: Is securitisation Islamic? This question, and similar questions about lots of other present-day financial instruments, arise naturally because there is nothing like securitisation that would have prevailed during the time the key tenets of Islam were written. But then, the key principles of brotherhood and humanity, and being devoid of attachment to material possessions, were the basis for the riba that a Muslim will not charge interest from other fellow brothers, and that money does not have either intrinsic value or time value. However, the world we live in is quite different – here, greed and selfishness are the very basis of our existence, and money is the form in which we measure and satisfy our greed. Similar question recently arose in Malaysian courts about BBA, a form of deferred sale perceived widely to be an Islamic product, and the court ruled in the negative.

Links: see our page on Islamic Financeworkshops on sukuks – securitisation school 

Korea's Kookmin Bank brings Asia's first covered bonds

Is securitisation rising from its ashes like a phoenix? Though the structured finance markets globally still remain jittery, this deal, and the other story on projected issuance in USA under TALF certainly give reasons for cheers.

South Korea’s largest lender – Kookmin Bank is all set to bring out Asia-Pacific’s first covered bonds issue. These bonds are backed by a pool of residential mortgages and credit card obligations. The bonds are described as covered bonds – however, unlike most European jurisdictions, there is no law governing covered bonds in Asian markets. This might perhaps be a reason why a very complicated transaction structure has been used in this case – almost verging towards the true-sale-type.

No matter the lack of law, S&P has given a AA rating to the bonds, which is good 3 notches above the rating of Kookmin (A-). S&P had recently issued a draft methodology for covered bonds 4th February, 2009

Notably, the pool consists of residential mortgage loans and credit cards – in a normal securitisation transaction, this would have been a queer mix, but in covered bonds, all that matters is the value of the cover, as investors are not necessarily paid from the cover pool. The bonds have a maturity of 3 and 5 years – another distinguishing feature of covered bonds being maturity mismatch between underlying assets and investor cashflows. Credit enhancement comes from a substantial over-collateralisation, as well as obligation of Kookmin to repay the bonds.

The transaction structure is complicated, and may be understood in following steps:
  1. Kookmin issues the bonds and gets $ equal to the senior interest of the loans.
  2. Kookmin entrusts the loans to a Korean Trust. This includes the overcolllaterlisation also. The Trust sells senior certificate to a Korean SPV, and junior interest back to KB. The Trust still has to pay money to Kookmin for the purchase of the senior interest (see Step 7).
  3. Korean SPV issues notes to Irish SPV equal to the senior interest. Irish SPV provides guarantee to bondholders for repayment of the bonds issued in step 1.
  4. Kookmin lends money under a subordinated loan to Irish SPV, equal to the senior notes. Kookmin has already got this money in Step 1.
  5. With this money, Irish SPV in step 4 pays for the Notes it buys from Korean SPV.
  6. Korean SPV in turn pays to the Trust in step 2 for the senior interest it bought.
  7. Trust pays the money to Kookmin – therefore, the proceeds of the notes issuance do a full round back to Kookmin.
Apparently, this is structured as a true sale – therefore, to the extent of the senior interest in the loans sold, the mortgage loans and credit cards must be replaced by the subordinated loan given to the Irish SPV. However, the transaction would almost inevitably carry a buyback option with Kookmin, thereby denying any true sale/ off balance sheet treatment. 
Reported by: Vinod Kothari
To learn more about covered bonds, see our page here 
Our Workshops: We discuss covered bonds full scale now in our 11th Securitisation and Covered Bonds School – for the forthcoming school in August 2009, click here

TALF backed issuances soon to pick up momentum

As the round three of TALF financing is nearing, US asset backed issuers have $3billion offerings for the investors in May, and in addition, there are more issues of indeterminate sizes that may be ramping up soon. This figure compares with funding of $ 2.7 billion under TALF-backed issuance in April.

For May, some of the TALF eligible offerings include Case New Holland, which has come up with $760 million ABS sale of securities backed by equipment loans Other issues like that of $1.125 billion Honda Auto deal and a $1 billion Volkswagen sale are issues backed by auto loans and will also be eligible for the TALF financing.

Among credit card deals JP Morgan is planning a $1 billion offering. Others like GE Capital, Harley Davidson also intend to be in the market. These and several other issuances are in the pipeline and considering the momentum that is picking up, the Fed is soon to come with two new interest rates for loans secured by asset backed securities with maturities of one and two years.

Further the Federal Reserve has also announced that it would extend loans against commercial mortgage backed securities in June for up to five years. TALF loans with maturities of five years will also be available for securities backed by students’ loan and loan from small businesses. An initial limit of $100 billion has been set for the five year loans and the limits are open for re-evaluation.

Reported by: Nidhi Bothra

EU approves new rules for Credit Rating Agencies

European Union approved the new rules on the Credit Rating Agencies (CRAs) that are designed to improve transparency provide information, integrity and impartiality to the investors. The general notion prevalent is that the CRAs have failed to duly warn the investors of the risks underlying the asset backed securities and has significantly affected the investors’ confidence while making investment decisions.

Under the new rules a firm seeking to issue credit ratings will have to get itself registered with the Committee for European Securities Regulators (CESR). Securities regulators grouped together are called a ‘college’ of regulators who shall be monitoring and supervising the activities on a day to day basis. The following are the specifications provided in this regard under the new rules

The key features of the rules are as follows: 

  • Disclosure of models, methodology and assumptions used in rating and instrument
  • Ratings of complex products to be differentiated by adding a specific symbol
  • Create an internal function to review the quality of ratings
  • CRAs are to publish an annual transparency report.
  • CRAs may not provide advisory services
  • CRAs to have two independent directors on their board
    • The remuneration paid to the directors will not be determined on the firm’s performance
    • The Directors can only be dismissed from the office in case of professional misconduct. 
    • The two directors will be elected for a term of 5 years and cannot be re-nominated.
    • One of the two directors needs to be an expert on securitization.

These rules are aimed to ensure that the rating agencies are cautious of the quality of the ratings and the methodology used for the same and that there is high level of transparency involved in their act to ensure that the ratings provided are of valuable use to the investors.

Reported by: Nidhi Bothra

The 2008 Global Securitization issuance down by 79% compared to 2007 - IFSL reports

The Murphy’s Law quite applies to securitization as well. The International Financial Services London came out with the Securitisation 2009 report. The report says that the Gross global securitization issue dropped from $3,817bn in 2007 to $2,777bn in 2008. The net global securitization issuance sold in the market and purchased by the investors dipped by 79% from $2,138bn in 2007 to $441bn in 2008 (Excluding securitization retained with the issuing banks, which are not included in the gross figures).

The sea plunge was visible in the quarterly issuance reports that the volumes fell from $149bn in Q1 to $60bn in Q4 2008. The first quarter of 2009 also indicates that securitization is at low ebb and that there is very little indication of recovery. The report provides a comparative view on the industry performance over the years world over. The report shares concerns by the leading industry groups in the securitization industry and talks about ‘restoring confidence in the securitization market.’ It lists out the multiple effects that lead to the debacle and also lists out few suggestive actions that the industry should consider. See full report here.

Reported by: Nidhi Bothra

FASB issues staff guidance on exceptions from fair value accounting in disrupted market conditions

The much awaited FASB Staff Position (FSP) on fair value accounting (FSB FAS 157-4) has been issued, quickly enough after the last FASB board meeting on 2 April decided to amend the provisions of the draft (FSP FAS 157-e – see our news item below). On 9th April, the FSP was issued, overriding FSB FAS 157-3 and providing guidance on departure from the “market value” rule in situations such as the present, where for many assets, markets have considerably thinned down or otherwise. For a background leading up to the FSP, see news item below.

The revised draft of the FSP, like the exposure draft, provides that where the volume or level of activity for an asset needs to be marked to market has come down as compared to “normal market activity” for the asset, then significant adjustments to the quoted prices may have to be made – indicating that the prevailing market price need not be taken as the basis of fair valuation, and other techniques of valuation may be employed. The other techniques of valuation include consideration of  the “transaction value” where the transaction may be taken to be conducted in “orderly” market situations; and  discounted values using discounting rates appropriate to the riskiness of the asset in question.

There is an illustration included in the FSP of junior tranche of an RMBS transaction involving alt-A mortgages. The examples comes up with a discounting rate of 12% for discounting the expected cashflows, while the quoted rates from reputable dealers implied yields of 15% to 17%. In other words, the value that the entity estimates is substantially higher than what is quoted in the market on the measurement date.

The IASB is also almost waiting to introduce similar guidance – see here.

The FSP introduces more subjectivity and more complexity in the already monumental fair value rules. The question at the end of the day is – what is the user getting out of this all? If the current market situation is not even representative of the exit price of the asset, why apply fair value at all. Standard setters have regrettably lost sight of the basic attribute of accounting statements – objectivity, as that comes from the FSP is a subjective valuation.

Reported by: Vinod Kothari

FASB to issue amended staff position on fair value accounting standard FAS 157

Mark-to-market accounting continues to remain the epicenter of this age of volatility. US standard setter FASB has responded to adverse industry comment on staff position paper FSP 157-e and voted, on 2 April 2009, to amend the proposed staff position.

An FSP is a statement of FASB staff views on an accounting standard. The relevant accounting standard here is FAS 157 dealing with fair value accounting. FAS 157 had required, effective from 15th Nov 2007 classification of assets and liabilities subject to fair value rules into 3 levels based on the transparency of such valuation. FAS 157 was issued in September 2006 when the goings-on were good. By the time of its implementation, markets had plunged into abysmal lows.

The markets that have prevailed over late 2007 to date easily qualify to be called “distressed” markets. The fair value accounting standards (both IFRS and FAS) contained an exception that in distressed (defined as not “orderly”) market conditions, the classification of assets as trading assets (which require daily mark to market) may be changed to assets that do not require mark-to-market.

FSP 157-e as proposed had suggested a two step approach to valuation in distressed markets. Step 1 contained an illustrative list of factors to consider markets as distressed. In step 2, there was a presumption that if the markets are distressed, then the quoted price is not representative of fair value. In that case, the FSP required the entity to use other methods for fair value determination, such as present value of expected cashflows.

The proposed draft of FSP 157-e was put for a 15-day comment period. As widely expected,  hundreds of comment letters were received. In response, the FASB decided to amend the FSP 157-e, to broadly incorporate more examples of situations in which the markets may be taken as distressed, and provide additional guidance on what fair value measures to use in such situations.

The FSP 157-e would  be reissued, and would be applicable for periods ending after 15th June 2009, with early adoption for periods ending after 15th March 2009. As markets for most of the sensitive assets such as derivatives may be taken as currently distorted (abnormal liquidity risk premiums or abnormal yields, abnormally wide bid-ask spreads, etc), this may be a relief for affected entities.

See the summary of the board's decision here

Reported by: Vinod Kothari

Islamic finance industry expected to grow to $1.6 trillion by 2012

With a 20% growth annually over the past several years, Islamic finance is growing at a fast pace with the estimates of the current asset ranging from $700 billion to $1 trillion. By a report from a consultancy firm, Oliver Wyman, the assets of the Islamic industry are further expected to grow to around $1.6 trillion by the year 2012 and that the biggest market for Islamic finance – Islamic wholesale banking will continue its strong growth to reach $1 TR with revenues of more than $60 BN.

The Islamic finance industry is still in its budding stage and there is a need for its banking sector to diversify to include other than generic sectors, like asset management, securitization etc. Islamic finance products are guided by the Sharia and Islamic laws and are open to wide interpretations. The conventional banking products can be dressed as per the Sharia requirements and can also accommodate the complexities of the conventional products, inspite the prohibitions and restrictions imposed by the Islamic laws.

The Islamic finance industry is in its nascent stage and countries with large Muslim population are awaiting development of the Islamic finance market. With the gloomy prospects of the revival of the dominant players in the near future and with countries like UK also tuning in to accept these unconventional products as ‘Alternative Finance Investment Bond’ the Islamic finance market is surely on its way to growth.

Reported by: Nidhi Bothra

Another bad news on the US ABS market

Where is the market heading? Probably this is the question that is playing on everyone’s mind and the unraveling quarter results are leaving people disheartened all the more. The existing credit crunch is acting as a catalyst to further unleashing misery, atleast the numbers tell such a tale.

The first quarter of 2009 reported a tremendous fall in asset backed securities issuances in the US as compared to the same period last year. The asset backed securities issuances stand at $13 billion at the end of the first quarter this year as against $61.9 billion in the same period last year, a 79% fall. The year on year comparisons on the ABS supply presents a gloomy picture as well. The final quarter for 2008 had a $3.6 billion ABS supply as compared to a total of $106.3 billion.

For more statistical information about ABS market click here.

End of off balance sheet for securitisation: IASB proposes changes in securitisation accounting norms

The international accounting standards setter IASB, on March 31, 2009 issued an Exposure Draft of changes in accounting standard IAS 39. The changes are focused on accounting for securitisation transactions. If the changes are carried out as proposed, this is like a clear end to off-balance sheet accounting for securitisation transactions.

The existing scheme of IAS 39 on securitisation accounting is like this: if risks/rewards in a financial asset are entirely retained, the transaction does not lead to off-balance sheet. On the other hand, if risks/rewards are entirely transferred, the asset is put off the books. These two extremes are most uncommon in real-life securitisation transactions. Hence, most cases involve retention of some risks/rewards and transfer of others. In such cases, the approach is one of partial de-recognition, and keeping the asset on books to the extent of “continuing involvement”. Continuing involvement is the stake of the transferor in the transferred asset – for instance, subordinated share, share in residual profits, servicing income, retention of significant options, etc. Most securitisation transactions have so far been qualifying for such partial derecognition, with only the retained components being put on the books, and the rest of the asset being de-recognised.

IASB now proposes to change the de-recognition algorithm, to provide that if there is a continuing involvement, there will be no off-balance sheet. Irony is that in most transactions, there is a continuing involvement. Under the proposed standard, de-recognition will be allowed only in 3 situations – (a) where all risks and rewards are transferred – which is almost never the case; (b) where the transferee has the practical ability to re-sell the asset for its own benefit – unlikely in case of any transfers to SPVs; and (c) where there is no continuing involvement at all. While the standard clarifies that mere retention of servicing by the seller is not a case of continuing involvement, clarificatory guidance on retention of subordinated investment and residual profits leaves no doubt that practically no securitisation transaction will qualify for off-balance sheet treatment.

Earlier, in Sept 2008, US standard setter FASB had likewise issued an exposure draft of changes in FAS 140. FASB has been waiting for IASB’s exposure draft, as the idea is to have convergent accounting principles on securitisation accounting.

It seems that we are heading towards end of off-balance sheet securitisation. To know more about accounting for securitisation click here.

Philippines comes out with its first RMBS transaction

The National Home Mortgage and Finance Corporation (NHMFC) with Standard Chartered Bank came up with the maiden 5 year RMBS issue worth 2.1 billion Pesos with a coupon rate of 8.4337 percent, 200 points above the five year bond benchmark. These bonds are called ‘Bahay Bonds’ and are backed by 12000 residential mortgage loans which originated from 1985 to 1996.

The bonds are exempted from withholding tax payments and are divided into two tranches and were rated by the Philippine Rating Services Corporation (PhilRatings). The AA rated senior notes of Pesos 1.754 billion and the BBB rated subordinated notes of Pesos 309.5 million. The sub notes are to be retained by NHMFC itself. The debt issue has several credit enhancement levels, apart from having a low loan to value ratio, the mortgage loan repayments are guaranteed by state run Home Guarantee Corp.

The first RMBS issue was well received by the investors and was over-subscribed. After the success of the first RMBS issue the government is eyeing more RMBS issues in the year. To know more about the story click here. To know more on the assigned ratings to the classes of securities click here.

Also see news on Indonesia’s first RMBS transaction here.

New reporting requirements for securitization SPVs in eurozone 

The European Central Bank has introduced new reporting requirements ‘financial vehicle corporation’ (FVCs) or SPV’s residing in the euro area. Under the new reporting requirements a FVC will have to notify the National Central Bank of its existence and make certain disclosures quarterly. The new quarterly reporting requirements will be applicable from December, 2009 but the notification requirements will apply from March, 2009 and will apply to all the FVCs incorporated or resident in euro area.

Apart from the disclosure requirements these regulations will also assist in data collection with regard to the securitization transactions. The ECB regulations are aimed at providing data on the financial activities carried out by the FVCs within the participating member states in the euro zone. These regulations also aim at aligning the reporting requirements with that of the Monetary Financial Institutions (MFIs). Integrating the reporting requirements of the two would make the disclosures more meaningful and useful. The ECB regulations define FVCs in article 1 and lays down details on reporting requirements some of the highlights are: 

  • Article 2 lays down that all FVCs residing in the territory of a participating member will form the reference reporting population
  • As per Article 4, the actual reporting population shall provide to the relevant NCB, data on end-of-quarter outstanding amounts, financial transactions and write-offs/write-downs on the assets and liabilities of FVCs on a quarterly basis as prescribed in the regulations
  • As per Article 7, FVCs shall comply with the reporting requirements to which they are subject in accordance with the minimum standards for transmission, accuracy, compliance with concepts and revisions specified in the annexure to the regulation

The European Securitization Forum has come together to actualize the requirements among the FVCs by organizing industry response, roping in interested market participants for their involvement and including common language in the transaction document to ensure that all FVCs comply with the new requirements. To read the more on the story and ECB regulations click here

Top economists suggest ways to 'smarter securitization'

As a part of Wall Street Journal’s, ‘Future of Finance Initiative’ eminent speakers Roger W. Ferguson Jr., President and CEO, TIAA-CREF and Myron S. Scholes, Nobel Laureate and Professor Emeritus of Finance, Stanford University; spoke on ‘The Future of the Credit Markets.’ The speakers discussed the problems confronting securitization and how with small reforms, ‘smarter securitization’ can be achieved.

In an effort to move towards ‘smarter securitization’ and to align the interest of the various parties involved in a securitization process few key areas of reform were addressed and improvisation on the same was suggested. In the discussion the speakers, named five areas where there was scope and need for change.

The speakers said that the disclosure norms needed revision; there was a strong need for the alignment of interest of the parties like the underwriters and the rating agencies. As the underwriters do not hold the resulting securities, the underwriting standards suffer. Similarly, as the investors are unwilling to pay for the ratings of the securities, it is in the interest of the rating agencies to be in the issuers’ camp. To increase transparency levels and do away with these problems it was aired that the interest of the various parties should be aligned. For the rating agencies to be more accurate a revision in the pay structure was suggested whereby instead of a one time payment, fees should be paid over a longer period of time. The next recommendation was on having constrained on the leverage which would mean increasing the capital requirements to match up the risk levels involved. The next recommendation was on amending the accounting standards to have a sensible set of accounting standards that would reflect value for financial reporting and capital purposes. The last recommendation was on reducing the role of the government in providing compensation to the companies in which it has a stake to ensure that the right kind of incentives were trickling down.

These recommendations aimed at reviewing the securitization market, rebuilding the financial systems and dealing with the present financial crisis. To read the full article click here. To read the full article on ‘The Future of Finance Report’ and related articles, click here.

ESF Principles on Transparency & Disclosures

The European Securitisation Forum published Principles for Transparency and Disclosures for Residential Mortgage Backed Securities issuers. These principles have been delivered to increase the transparency, improve reporting standards and formats and to assist the regulators and the speculators who play an active role in the securitization industry. The basic objective of these principles is to provide investors with a mechanism whereby they can independently adjudge the creditability of the transaction so as to reduce complete dependence on Credit Rating Agencies for investment decisions.

These are voluntary principles and are applicable for RMBS structures originating in European Economic Area (EEA). The principles deal with pre-issuance information disclosures in the form of issuance of prospectus and offer documents as well as post issuance information disclosures in the form of investor reporting and ad hoc disclosures. With enhanced levels of comparability disclosures, these principles will enable the investors to make informed decisions. These principles include two data reporting templates for the issuers – ESF Prime RMBS Standardised Reporting Template and a new combined uniform Credit Rating Agency Reporting Template for UK Non-Conforming RMBS.

These principles were released in response to the Ten Industry Initiatives to Increase Transparency in the Securitisation Market as committed to the European Commission and are in response to the challenges posed by the Financial Stability Forum and International Organisation of Securities Commissions’ recommendations to improve transparency and disclosures. These principles have been drafted to improve four aspects of data disclosures: transparency, accessibility, comparability and granularity and have been prepared in consultation with RMBS issuers and market participants.

To know more on the templates and disclosure norms, see here

UK's Asset Protection Scheme

As the losses on asset backed securities bought by banks over the past continued to mount, UK Treasury came up with a scheme that will suck out losses above particular levels, thereby maintaining the capital of UK institutions. The Asset Protection Scheme is about protecting the banks’ assets against losses (second level losses) exceeding levels that are to be fixed for each asset on case by case basis. The UK Treasury would be protecting the participating banks from such second level losses for a fee. The eligible assets would include Mortgage Backed Securities, CDOs and CLOs, certain Asset Backed Securities, corporate or leveraged loans and any closely related hedges, in each case, held by the participating institution or an affiliate as at 31st December 2008 and can be denominated in any currency. The Treasury may include such other assets on appropriate investigation for appropriate fees. The other features of the scheme briefly are as follows:

·        The Treasury will initially extend its protection offer to UK incorporated authorised deposit-takers (including UK subsidiaries of foreign institutions) with more than £25 billion of eligible assets and later extend it to other authorised deposit-takers as well. Other entities may be considered in the light of its assessment of the impact on financial market stability and the overall economy and the most effective possible use of public resources.

  • There will be a verifiable commitment agreed between the participating institution and the Treasury to support lending to creditworthy borrowers in a commercial manner. The commitment demanded from participating banks is to increase their lending to creditworthy homeowners and businesses.

    < > The Treasury expects to provide protection for those assets on an institution’s balance sheet  where there is the greatest degree of uncertainty about the future performance of those assetsThe management and control of the assets will remain with the participating banks subject to such conditions as considered appropriate by the Treasury to take the management and control in its own hands. The assets will remain on the Balance Sheet of the participating institutions but the actions taken in relation to these assets shall be monitored by the Treasury and under its appropriate controlThe duration of the scheme will be consistent with the tenor of the asset and will be not less than 5


    US Federal Reserve to pump in $200 billion to spurt sagging ABS market

The US Federal Reserve and the treasury launched TALF (Term Asset backed securities Loan Facility) - asset securitized loans in an effort to help consumers avail loans and put the credit market on the roll. The USD 200 billion funding program intends to provide loan to the purchasers of AAA-rated securities of the newly securitized credit card, auto, students and small business loans. The interest rates will range from LIBOR plus 50 basis points for students loan to LIBOR plus 100 basis point for a credit card loan to the likes. The intent of the plan is to induce investors to asset backed securities which in turn generate more lending

The following are the features of TALF:

  • TALF loans will have a term of three years with monthly interest payments. These loans will not be subject to mark-to-market or re-margining requirements
  • Non-recourse to the borrower

·        Eligible Collateral: For ABS to be eligible collateral and the dates of origination for the underlying credit exposure will be as specified in the terms and conditions of the program. ABS used as collateral that has a credit rating in the highest long-term or short-term investment-grade rating category from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a credit rating below the highest investment-grade rating category from a major NRSRO. Eligible auto loan ABS and credit card ABS must have an average life of no more than five years.

  • The set of permissible underlying credit exposure of eligible ABS includes
    • Auto loans which will include retail loans and leases relating to cars, light trucks, recreational vehicles, or motorcycles, and will include auto dealer floorplan loans
    • Student’s loans will include federally guaranteed student loans (including consolidation loans) and private student loans
    • Credit Card Loans
    • Small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration
    • The set of permissible underlying credit exposures of eligible ABS may be expanded later to include commercial mortgages, non-Agency residential mortgages and/or other asset classes
  • Eligible borrower: Any US company as specified in the terms & conditions of the program that holds eligible collateral can borrow from TALF

·        For ABS benefiting from a government guarantee with average lives beyond five years, haircuts will increase by one percentage point for every two additional years of average life beyond five years. For all other ABS with average lives beyond five years, haircuts will increase by one percentage point for each additional year of average life beyond five years.

  • TALF loan subscription and settlement dates will be announced monthly

The first fund will be released by March end and TALF will cease making loans by December this year.

The ABS issuance in US has come down from US$ 906.6 billion in 2006 to US$ 151 billion in 2008. The three year low interest loan facility intends to churn credit and restart the securitization machine which has experienced heavy downturn in the recent years as indicated by the figures.

TALF has invited mixed bag reactions, where some are interested and keen on participating, others are of the view that there is a long way for securitization to make a come back. Read more on the Federal Reserve press release and the terms and conditions applicable on TALF here

Indonesia's first RMBS issue

On 11th February, 2009, PT Sarana Multigriya Finansial (Persero) or PT.SMF came out with its first RMBS issue. PT.SMF, a secondary mortgage corporation owned by the government of Indonesia, started operations in first half of 2006 and has been involved in developing the secondary mortgage market in Indonesia. PT.SMF is securitizing pool of mortgage loans receivables worth Rp 500 billion, originated by PT. Bank Tabungan Negara (Persero) ("BTN").

The securities will be issued in two series, the first issue being of Rp 100 billion of Class A EBA Certificates rated by Moody’s Indonesia. Moody’s ratings are based upon several factors including credit enhancement and liquidity available to Class A EBA by issuance of Class B EBA Certificates and a reserve fund, these loans have a low loan-to-value of 48.35% and long seasoning of 4.64 years, external factors like the economic environment and the real estate markets

The second deal which will be four times the debut transaction is expected to close around the third quarter in this year. With a positive beginning, there is a potential of more of these deals in the times to come by.

Links: For more on Securitisation in Indonesia, see our country page and to know more about RMBS transactions, see here.

Crisis spurts securitization litigation

As one would expect, a crisis time is a boom time for litigation lawyers. As pains of the crisis spread, people are exploring ways to lay blame on someone, somewhere else. Those who bought loans are  suing those who sold; those who insured securitizations are suing those who originated; servicers are suing trustees, and so on. As they say, it is trying time - so, lots of securitization questions are facing trial right now.

Insurance company MBIA has sued Residential Funding, a unit of GMAC. MBIA had also sued Countrywide, alleging that the transactions it insured made misrepresentations about quality of loans.

There have  been several cases relating to CDOs. A webpage by Nixon Peabody (here) says there has  been a surge in disputes relating to “waterfall”  clauses,  or between noteholders and swap or liquidity counterparties, regarding subordination and priorities of payment stemming from an event of default (EOD), acceleration of maturity, and liquidation of collateral under such indentures. The page refers to at least two cases: LaSalle Bank Nat’l Ass’n v. UBS AG and Merrill Lynch International, 08 CIV 3692 (S.D.N.Y., filed April 7, 2008), and a UK ruling relating to an SIV, Bank of New York v. Montana Board of Investments [2008] EWHC (Ch.) 1594 (Eng.),

In yet another case, Brooke Capital, a servicer, has sued the trustees for not paying the servicing fees.

There has been a series of cases where foreclosure actions by securitization trustees have been in various controversies.

New Century Bankruptcy examiner points several securitization accounting lapses

The report of the Bankruptcy Court-appointed Examiner in the bankruptcy of New Century, a subprime originator that filed for bankruptcy earlier last year, has pointed out several securitization accounting lapses. Fair value based accounting has become intensely subjective; it is a statement of opinions and not a statement of fact. Any opinion can be questioned, as on every issue, there is a minimum of two opinions.

The 581-page report goes into New Century’s business models, etc. and spends nearly 200 pages on securitization accounting issues – valuation of residuals, valuation of mortgage servicing rights, etc.

On securitization accounting, the Examiner commented that New Century was using antiquated Excel-based models whereas it ought to have used third-party vendor models. One of the key assumptions in valuation of residuals is the discounting rate. A risk-adjusted discounting rate is used which reflects the riskiness of the residual cashflow. New Century, the Examiner says, was using a discounting rate of 12-14% whereas peer firms were using 15-21% discounting rates. In addition, New Century wrongly made an assumption that on clean up of transaction when the pool value falls, the loans may be sold at par value.

There are similar allegations of flawed assumptions on valuation of mortgage servicing rights as well.

Links: See our securitization accounting page. For a US workshop where we focus on securitization accounting, see our workshops page.


Paulson Plan proposes Mortgage Origination Commission

US financial regulators presented, on 31st March 2008 a Blueprint for Modernized Financial Regulatory Structure, commonly referred to as the Paulson Plan in response to the ever-bludgeoning problems of the subprime crisis. The study distinguishes between short-term and intermediate term objectives, and presents what it calls an “optimal” objective-based model to regulate financial institutions. It recommends a threesome regulatory structure, splitting between (a) market stability regulation, (b) safety and soundness regulation, and (c) business conduct regulation.

Among the short-term objectives of relevance to the securitization industry, the following recommendations are notable:

There is proposed a Mortgage Origination Commission for licensing and regulation of agencies involved in the mortgage origination process. In addition, Federal laws should ensure consumer protection in mortgage origination.

Links The text of the Blueprint is here.

President's Working Group announces measures about securitization

The inter-agency group of financial regulators, President's Working Group on Financial Markets (PWG) announced some measures yesterday aimed at containing the fire that seems to be blazing the global financial markets, esepecially those in the US.

The PWG has proposed a range of measures to contain the crisis. Those pertaining to securitization can broadly be classed into two: 1.words of advice and some regulatory responsibility for market players, including mortgage brokers, rating agencies, originators and regulators; 2. Introduction of covered bonds and formalization of bankruptcy remoteness. From the second measure, it seems evident that the US will make positive moves towards on-balance sheet securitization in time to come.

Here are some extracts from the PWG report:

"Mortgage Brokers will be held to strong national licensing and enforcement standards. There will be stricter safeguards against fraud, and full and clear disclosure to borrowers about home loan terms, including long-term affordability.

Credit Rating Agencies will clearly differentiate structured product ratings from ratings for corporate and municipal securities. They will also disclose reviews performed on asset originators, and strengthen data integrity, models and assumptions.

Issuers of Mortgage-Backed Securities will disclose the level and scope of due diligence performed on underlying assets, disclose more granular information regarding underlying credits. And, if issuers have shopped for ratings, disclose the what and why of that as well.

Investors will conduct more independent analysis and be less reliant on ratings. They will require, receive and use more information and more clearly differentiate between structured credits and corporate and municipal securities.


Regulators have a role to play in every change. They will issue new rules and seek regulatory authorities as needed, evaluate progress, provide guidance and enforce laws – to ensure that implementation follows recommendation.

Covered Bonds, which allow banks to retain originated mortgage loans while accessing financial market funding, are another alternative worth considering. Covered bonds may address the current lack of liquidity in, and bring more competition to, mortgage securitization. Rule-making, not legislation, is needed to facilitate the issuance of covered bonds. Through clarification of covered bonds' status in the event of a bank-issuer's insolvency, the FDIC can reduce uncertainty and consider appropriate measures that will protect the deposit insurance fund. These steps would encourage a covered bond market in the U.S.; similar changes in Europe have resulted in more covered bond activity".


ABS issuance falls 30% in 2007

2007 is, beyond doubt, one of the worst years in recent memory for financial services in general, but for securitization, it will go down in history as the worst, as, for the first time since its inception, issuance volumes took a deep dive of 30%.

Financial press cited Thomson Financial data to report a 30% decline in issuance volumes with the steepest decline, quite obviously, from the home equity segment (nearly 62%). According to Thomson Financial data, issuance in 2007 added up to $ 864 billion, compared to $ 1249 billion in 2006.

The data available on shows worldwide ABS issuance added upto $ 996 billion, compared to last year's volume of $ 1322 billion.

The drying up of liquidity is also evident from the spreads on AAA home equity ABS - reported to be about 220 bps for 2 years and 280 bps for 5 years, whereas the average spread for 12 months is just 74 bps.

Financial press is abuzz with news stories about the death of securitization, but clearly, the originate-to-distribute model on which banks work today will continue in some form or the other. Hence, either in cash form or synthetic form, securitization would continue. Securitization is an excellent tool for integration of capital markets with asset markets - hence, its basic economic rationale is beyond question, though there might be rethinking on off balance sheet and special purpose entities. 2007 may prove to be the worst, and that is over.


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