Thursday, June 24, 2010

Collapsed debt market poses dilemma for G20

Some pithy commentary from Gillian Tett:

At the height of the credit bubble in June 2007, European bankers working in the world of complex credit were so optimistic about the future that they held their annual meeting in swanky Barcelona and threw parties flowing with champagne.

No longer: last week the European Securitisation Forum – the body that represents bankers slicing and dicing debt – held its annual meeting in Edgware Road, a scruffy quarter of London. As attendees sipped their coffee, the group creating a buzz were not hedge funds but government officials, particularly those from the European Central Bank...

Unsurprisingly, all western central banks are deeply uncomfortable about the fact that they, in effect, have replaced, or become, the securitisation sphere. They are thus looking for exit strategies and urging the banking industry to restart the securitisation machine...

While such reforms are laudable, unfortunately they are unlikely to be enough. In 2007, when bankers were guzzling champagne, a large source of the demand for securitised bonds came from quasi “invented” buyers – that is, banks and bank-funded vehicles that were developing investment strategies to take advantage of regulatory and rating agency loopholes, fuelled by artificially cheap loans.

Cheap funding has since vanished and governments are determined to close all those loopholes. As a result, those invented buyers have disappeared.

That need not spell the end of securitisation, per se. After all, there are still real money investors out there, such as pension funds, which could buy securitised bonds. But if these real investors reappear, they will demand much better returns. That means the market will be smaller in future, and funding costs will rise.

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