Government programs such as the Term ABS Loan Facility (TALF) have restored basic investor confidence in the ABS product, said panelists at the American Securitization Forum’s conference in Washington, D.C. this week.
Speakers expressed this optimism at the panel called Restoring the Private Securitization Market and Unwinding Government Support Programs.
“Certainly TALF has been a huge success,” said Paul Colonna, president and CIO in fixed income at General Electric Investment Corp. He specifically mentioned credit cards and autos as the sectors TALF benefited.
Colonna also noted the success of the Public-Private Investment Program (PPIP), which has prevented distressed asset sales and restored originator capital.
Thus far, according to the latest numbers, $4.3 billion has been invested under the program. The breakdown: 87% in the non-agency RMBS market, and the remaining 13% in CMBS.
Some panelists, however, expressed reservations about some aspects TALF. Ish McLaughlin, a managing director at Citi, said that his one concern about TALF is that it has a very narrow investor base, “to build this house.” This is in direct contrast to the investment-grade corporate sector, which has a considerable number of investors.
In terms of government initiatives to boost loan modifications in non-agencies, these efforts have a built-in risk premium, panelists said. Investors now have to consider two factors in their investment decisions: the macro housing environment and the uncertainty premium from modified loans, which investors have yet to put their arms around.
Hindrances to Restoring Private ABS
Panelists also talked about the implications of retaining risk on the issuers’ balance sheet. According to John Kiff, a senior economist at the International Monetary Fund, a 5% retention as applied to risk exposure is “way to blunt.” He mentioned covered bonds as an alternative option. This sector has a 200-year history in Europe and is a cost-effective means of funding, he noted.
However, no amount of skin-in-game will offer a solution if the fundamental problem is not solved. Adam Ashcraft, vice president and head of structured credit at the Federal Reserve Bank of New York, cited the risks in re-securitizations.
He then said that the basic problem is that players are tying long-term risky debt to short-term investments. This cannot be addressed, according to him, through solutions including the supervision of investor risk management.
A Permanent Backstop?
Panelists were also asked whether they would want the government to provide a permanent backstop to the securitization market.
GE's Colonna said he would rather not have one than have to deal with the myriad of financial programs that represent too much regulation.
He added that government programs are both hard to communicate and bring uncertainty to the marketplace. He would rather see ABS players go back to making risk and return trades and be compensated for them, rather than securitization be supported by government initiatives.
