Really, I have nothing against bankers. Hey, I'm a born and raised New Yorker, many of my friends are bankers. The problem is that so many people tend to believe the bullshit that bankers say. Now, I can't blame the bankers. After all, its every man (and woman) for themselves. Still, it wouldn't hurt to use a little common sense once in a while. From the FT.com:
The US Treasury is planning a sweeping overhaul of securitisation markets with tough new rules designed to restore confidence by reducing the incentive for lenders to originate bad loans and flip them on to investors.
The authorities plan to force lenders to retain part of the credit risk of the loans that are bundled into securities and to end the gain-on-sale accounting rules that helped spur the boom of the markets at the heart of the financial crisis.
The aim is to revitalise the markets for securities backed by mortgages and other assets without re-creating the systemic risks that turned boom to bust in 2007. The plan is part of a wider overhaul of regulation to be unveiled on Tuesday.
A Treasury spokesman said that while securitisation had made credit more widely available, breaking the direct link between borrower and lender had "led to a general erosion of lending standards, resulting in a serious market failure that fed the housing boom and deepened the housing bust".
Securitised markets - which financed more than half of all credit in the US in the years immediately preceeding the crisis - are essential for the US economy. Without a recovery in these markets, the flow of credit will not return to more normal levels [Actually, I think the more appropriate term is "return to levels that have occurred in very recent history". After all, asset securitization has only been prominent for a couple of decades. The world was able to create loans for the past 5,000 yeaers or so, I don't see out the last 20 or 30 years necessarily defines normal, but I get their point.], even if US banks overcome their problems.
The Treasury hopes its plan will help bring these markets back to a more stable form by improving information and changing incentives. However, bankers warned that the new rules would reduce incentives to package assets into securities, raising financing costs. [Translation: "However, bankers warn that increased transparency, accountability and responsibility will significantly draw down the availablity of bonuses and outsized profitability and cause us to direct our efforts elsewhere in an attempt to increase opacity and decrease accountabiilty in order to charge more for our services"]
"It is the beginning of the unwinding of the securitisation-for-sale model," a senior Wall Street banker said. "By forcing lenders to keep part of the loans and scrapping ‘gain-for-sale', the government will raise the cost of capital and put a damper on the reopening of credit markets." [Well, Reggie posits "It may not necessarily be a bad thing to raise the cost of capital if said cost of capital is too low to begin with. An imprudently low cost of capital is what brought upon the bubble to begin with, and the consequent melee that was the bubble's bursting. Do you really think that just because the cost of capital is low, it is a good thing. The cost was low because the risk of loss was never properly priced into the securities. By forcing the originators to accept just SOME of the potential losses, prudence will now be "PARITALLY" priced into said securities. Now that I think about it, the cost of captial doesn't necessarily have to go up. You, Mr. Banker, can still sell the securities at their historcial prices as you retain the risk of loss, after all many of them are rated AAA, right???? Why in the world would you raise the cost of capital now, that you have skin in the game, unless you somehow value your skin more than the skin of the
suckers, ahem, clients that you sell too?"]
Some experts also question the wisdom of forcing banks to retain exposure to loans sold as securities, saying that it might be better to encourage banks to properly rid themselves of all exposure to such credits. [And why is that???]
The Treasury plans to force lenders to retain at least 5 per cent of the credit risk of loans that are securitised, ensuring that they have what investors call "skin in the game". The 5 per cent rule - which looks set to be applied in Europe as well - is less draconian than some bankers feared. The proposed elimination of "gain on sale accounting" is to prevent financial companies from booking paper profits on loans - packaged into securities - as soon as they were sold to investors.
Banks would only be able to record income from securitisation over time as payments are received. Brokers' fees and commissions would also be disbursed over time rather than up front, and would be reduced if an asset performed badly due to bad underwriting. [Now, that is what I consider Draconian! Do you acually mean to tell me that you now cannot book a profit until you actually make some money! The F#%$ing nerve of these people!]
The US authorities also plan to stop credit rating agencies from assigning the same types of ratings to structured credit products that are assigned to corporate and sovereign bonds, meaning there would be no more AAA-rated subprime securities. [Why! I have a better idea. Why don't we just make them stand behind their ratings? If they can be found to have materially misrepresented or ommitted a fact or somehow have been negligent they should bear the legal liabilities and consequences of such. The agencies should be allowed to pack in the cost of liability coverage into the ratings fee itself, thus the agencies can rate said securities any way they want. If they play games it is their asses on the line, and not the sheepish, ignorant investor. Somehow, I feel ratings quality will increase substantially, and increase literally overnight!]
Contracts would be standardised to ease comparability and trades included in an electronic database currently used for corporate bonds. [Why wasn't this the case from the beginning?]
Sponsors would be required to stand behind their securities by providing warranties as to the origination and the underwriting standards on the loans. [Why wasn't this the case from the beginning?]
Credit ratings agencies - most of which are paid by the issuers to rate securities - would have to strengthen their policies for handling conflicts of interest. [This is a game! Strengthen policies for handling conflicts of interest???!!! If there is a conflict, it is just that - a conflict and will eventually rear its head to the detriment of the wearker party. If one were to take my advice stated above, the conflict will be removed and we will not have to play the game of "policies for xyz". Once the agencies asses are on the line in terms of liability, they will remove conflicts of their own accord and will not have to be prompted by any governement body, nor wil they have to be watched by some overdog agency either!]
They would have to develop a new vocabulary to rate structured credit - a move intended to underscore the fact that a triple A rating on a corporate bond and on a mortgage-backed security mean very different things.