A crowd of at least 50 people abandoned their breakfasts at nearby banquet tables to watch U.S. Treasury Secretary Tim Geithner outline his plan to rescue the financial system Tuesday morning.
They gathered around a flat-screen TV at the Wilmington Trust booth in the exhibit hall of the American Securitization Forum convention at the Venetian Hotel in Las Vegas. It beamed CNBC’s coverage of the speech, prompting snickers in the group about the stock market’s 200-point drop as Mr. Geithner spoke.
“The marketplace wanted to hear more detail from Geithner,” says Julia Coronado, U.S. economist at Barclays Capital.
The government’s plan impacts attendees of this conference quite directly, and many have expressed skepticism that the government’s plan will jump-start the markets for securities backed by pools of mortgage or consumer loans. Attendance at the event was roughly half the approximately 7,000 or so attendees of earlier years, and there were no highly publicized big parties. On the other hand, many attendees are first-timers from small investment shops, say organizers, and the Securitization 101 educational panel on the first day was packed, says Ralph Daloisio, managing director at Natixis, and new chairman of the ASF. In recent years it was empty.
As bankers, lawyers, investors and technology providers involved in structuring, valuing and selling asset-backed securities backed by auto, credit cards, student and small business loans, their livelihoods have nearly ground to a halt, since the market for these loans seized up last fall. According to Dealogic, issuance of asset-backed and mortgage-backed securities is down 91% year-to-date in terms of dollars, with just $4.6 billion issued this year. These markets have been waiting for some firm initiative to help get things functioning again.
Mr. Geithner’s new plan addressed two pillars preventing lending to consumers. The idea of an investment fund with private market partners is intended to find ways to move bad assets off of banks’ balance sheets. And, expanding the Term Asset-Backed Securities Lending Facility to lend to investors to buy Fed-approved securities is encouraging to most, even though there is push-back from hedge fund investors and lenders on the terms of TALF.
“The government is trying to jump ahead of this crisis,” says Mr. Daloisio. Expanding TALF before the industry has truly embraced it means “they have to make it work.”
Bankers say that the Fed’s loan terms, as announced last Friday, pushed many hedge funds away because at rates lenders are willing to make loans, the funds cannot reach their goals of obtaining double digit returns. Issuers are also not eager to borrow for three years at onerous rates.
Others zeroed in on Mr. Geithner’s emphasis on involving private capital to the programs to restore financial markets to health. “We are moving in the right direction by getting private money involved,” said Paul Jorissen, partner at New York law firm Mayer Brown LLP. “It is a really important inflection point.”
He adds that private equity firms may play a role in the program, adding that there are ways to structure investments for private equity that allows them to inject capital into troubled banks, and that with more participation, there will be less of a wait-and-see approach to the financial markets. Previously, investors were hoarding their cash as they wait for the government’s next move.
The introduction of private money into the programs may also bring some clarity to pricing of banks’ troubled assets, said Nellie Liang, associate director of the Federal Reserve Board, on a panel. She added that the private sector should be setting market prices, not the Fed, though she noted the difficulty in evaluating pricing on such complex instruments.
“There’s a little bit of hope here and a little bit of thinking this will really work,” said the Fed’s Ms. Liang, on the question of pricing.
“The government isn’t going to be able to find that clearing price,” said Evan Firestone, president of New York-based Firestone Consulting, which advises on the structures of mortgage securities and products. “That’s best left to the private sector.”
But Mr. Firestone said that one problem for the private sector–banks and hedge funds–is bridging the gap between the sales price for consumer-loan securities and the price that distressed buyers such as hedge funds are bidding.
TALF has attracted interest from dozens of hedge funds who had previously never been interested in asset-backed securities — once the investing purview of insurance companies, pensions and other institutions that focus on only highly-rated securities. Now there are distressed players in the mix.
Ms. Liang said the government is aware of the risks inherent in TALF’s reach to hedge funds as well. “We need to make sure the government is not taken advantage of,” said Ms. Liang.