Crack and CassandraTo deal with the first one, perhaps we should have seen it coming. I have checked my files, and my first use of the phrase "too good to be true" in writing was on 27th April 2007, in the context of the dreaded CPDOs. I also got some stick when addressing a non-conforming mortgage conference in December 2006 for some slides suggesting that a bubble was a reasonable analysis. But this was like the shadows in Plato's cave-at no point did I predict what has occurred; it was just an inkling that something was not right. Most had no inkling, and the very few who called it right were Cassandras-doomed to be both right and not believed.
On the second point, it concerns me that so many people are rubbishing risk distribution. It is, nonetheless, a fundamentally sensible approach. Banks have been doing it for centuries: Bank A has a large customer and cannot prudently lend more, so sells or sub-participates some of the risk to Bank B. Everyone benefits. The moral hazard is that Bank A originates a bad loan and flogs it off whilst trousering a fat fee. That needs to be controlled, but banning risk transfer would make for a very inefficient financial system: banks would have risk concentrations, and investors would have a poor selection of low-yielding investment opportunities. That's our pensions suffering, amongst other things.
A recent research piece by Barclays stress tests RMBS to a "severe" standard, including a further 30% fall in house prices from Sep 2008, which they describe as being beyond AAA. None of the 61 AAA tranches in the UK, nor the 16 in Ireland, suffered a loss under this scenario. Yet these bonds can be bought at a yield of 3-400bp. A prudent re-opening of this market would help the housing market by getting money to housebuyers, with a knock-on effect on confidence.
[ add comment ] ( 98 views ) | permalink
Calendar
