The Securitization Boondoggle

Weekend Edition
October 9-11, 2009

Down the Rathole

Mike Whitney

The relentless financialization of the economy has resulted in a hybrid-system of credit expansion which depends on pools of loans sliced-and-diced into tranches and sold into the secondary market to yield-seeking investors. The process is called securitization and it lies at the heart of the current financial crisis. Securitization markets have grown exponentially over the last decade as foreign capital has flooded Wall Street due to the ballooning current account deficit. A significant amount of the money ended up in complex debt-instruments like mortgage-backed securities (MBS) and asset-backed securities (ABS) which provided trillions in funding for consumer and business loans. Securitization imploded after two Bear Stearns hedge funds defaulted in July 2007 and the secondary market collapsed. Now the Federal Reserve and the Treasury are working furiously to restore securitization, a system they feel is crucial to any meaningful recovery.

But is that really a wise decision? After all, if the system failed in a normal market downturn, it's likely to fail in the future, too. Is Fed chair Ben Bernanke ready to risk another financial meltdown just to restore the process? The Fed shouldn't commit any more resources to securitization (over $1 trillion already) until the process is thoroughly examined by a team of experts. Otherwise, it's just good money after bad.

Here's Baseline Scenario's James Kwak digging a bit deeper into the securitization flap:

"The boom in securitization was based on investors’ willingness to believe what investment banks and credit rating agencies said about these securities. Buying a mortgage-backed security is making a loan. Ordinarily you don’t loan money to someone without proving to yourself that he is going to pay you back...

The securitization bubble happened because investors were willing to outsource that decision to other people — banks and credit rating agencies — who had different incentives from them." (Baseline Scenario)

http://www.counterpunch.org/whitney10092009.html

by Mike Whitney / October 6th, 2009

Fed chief Ben Bernanke is in a bit of a bind. He’s being asked to restore a system for credit expansion which collapsed more than two years ago and has shown no sign of life ever since. During the boom years, securitization accounted for more than 40 percent of the credit flowing into the economy. No more. When two Bear Stearns hedge funds defaulted in July 2007, the system crashed as investors of all stripes backed away from complex, illiquid assets. The Fed’s TALF lending facility — which provides up to 94% government funding for investors who are willing to purchase bundled debt for credit cards, mortgages, auto loans and student loans — was intended to breathe new life into securitization, but has fallen woefully short of its original objectives. It pretty much fizzled on the launching pad. Even the shrewdest hedge fund sharpie couldn’t figure out how to make money on (what amounts to) fetid assets.

Ironically, the Fed’s original plan for the TALF would have involved a $20 billion loan from the Treasury levered 10 to 1 to provide up to $200 billion in funding support for applicants. In other words, the Fed was planning to borrow money, to lend to people (investment banks and hedge funds) who were borrowing money to lend to people who were borrowing money (consumer credit cards, mortgages, car loans etc). Read that sentence again to fully appreciate how utterly fouled up the credit system really is. The Fed and Treasury are like private equity hucksters overseeing an inherently corrupt and immoral system. Michael Moore is right.

Fortunately, Bernanke’s plan to rebuild securitization has no chance of succeeding. The system can’t be restored because it required conditions which no longer exist; a strong currency, mega-surplus capital, and credulous investors who were unaware of the implicit risks of illiquid assets. Today, the dollar is wobbly, money is tight, and the pool of dupes ready to be fleeced has been greatly reduced. The notion that Wall Street can better perform the tasks traditionally left to highly-regulated banks, has also been called into question and rightly so. Unfortunately, the largest banks in the country — which have transformed themselves into investment casinos — don’t have the ability to return to the more conservative model of long-term lending to qualified applicants. They are stuck in a post-Glass Steagall mold, incapable of turning a profit on conventional loans to consumers and businesses. There’s a glaring need for some opportunistic entrepreneur (Warren Buffet?) to step into the breach and create a bank where depositors feel comfortable leaving their life savings knowing their bank is at least a notch-or-two above a Monte Carlo roulette table.

http://dissidentvoice.org/2009/10/bernanke-rolls-snake-eyes/

http://www.pbs.org/moyers/journal/10092009/watch.html


BILL MOYERS: Welcome to the JOURNAL.

I sat in a theater packed with passionate moviegoers, every one of them seemingly aghast at the Wall Street skullduggery exposed by Michael Moore in his latest film. It's called 'Capitalism: A Love Story.' Here's an excerpt:

MICHAEL MOORE: We're here to get the money back for the American People. Do you think it's too harsh to call what has happened here a coup d'état? A financial coup d'état?

MARCY KAPTUR: That's, no. Because I think that's what's happened. Um, a financial coup d'état?

MICHAEL MOORE: Yeah.

MARCY KAPTUR: I could agree with that. I could agree with that. Because the people here really aren't in charge. Wall Street is in charge.