Irish Independent Article- who is Robert Senior?http://www.independent.ie/business/iris ... 06086.html
The writer was billed as "Robert Senior", which is odd, since I distinctly remember writing it myself!
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I chaired a panel at a German conference five years ago, and introduced the session by saying "Voltaire once said that if God did not exist, it would be necessary to invent Him. Can we, ladies and gentlemen, say the same about Landesbanks?". The panellist from a Landesbank did his best to defend the indefensible, but the fact remains that, even then, it was clear that Landesbanks were an anachronism, desperately looking for a role. They only still exist, of course, because they filled their boots with funding prior to 18th July, 2005 when the state guarantee went away. Otherwise these wholesale-funded entities would all be long gone.
Fast forward five years. I met the head of a monoline insurer last week. Trying to be polite, I said that it would no doubt be necessary to change the business model. The reply was short, clear and not to be repeated in this blog, but the essence was that the old monoline model is dead. This man was moving his business model well away from the old monoline approach.
Which brings us to what Nietzsche can teach us about the current markets: "Umwertung aller Werte" ("Revaluation of all values"). There are many people in the market yearning for things to be as they were. It isn't going to happen, just as we're not going back to primary school.
Setting aside those who go on about "transparency" more as a Pavlovian reaction than a subtle analysis (I've been hearing this in one form or another for 15 years or more), we need to answer the basic business question as to how we get funding from those who have it to those who need it. Traditional securitisation is not the answer, certainly at present. There are several possible ways forward-for example, I'm currently involved in a Sharia-compliant trade financing project.
But one which to my mind has a real future is covered bonds.
Covered bonds are far more flexible than in the past; are simple and transparent; and can be based on a wide range of assets, not just mortgages and public-sector debt. In addition, the "moral hazard" problem is not there, since the issuing bank is fully liable for the debt.
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The Stranglers were one of my favourite bands from college days. In "Hanging Around" they sang "There's a million of them selling/And a buyer can't be found". Sounds like current markets.
I'm concerned that accountants (and I am one) have played a significant role in the current crisis. Fair value accounting has become the norm in the last few years. The underlying assumption was that market value (mark-to-market or MTM) and fair value are pretty much the same thing.
Maybe in stable markets, but not at the moment. Is the "fair value" of oil $147 or $90? We've seen both in the last 2 months. Do market prices of ABS reflect the amount investors are likely to get back over time? Fitch did an exercise in stress-testing Irish RMBS a couple of months ago. They assumed in their "severe" case 9% defaults and 40% market value declines-but not only did the AAA bonds not default, they were not even downgraded.
Nonetheless, banks holding such assets have to take MTM "losses" through their P+L accounts, which reduces their capital base and destabilises their position in the market, contributing to the current panic. $500bn+ has been written off as losses by banks already. Does this really reflect what is likely to be lost over time, or is it just a function of a febrile market? There's much to be said in favour of old-fashioned historic cost less reserves accounting in times such as these.
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The ECB announced last week a significant increase in haircuts for ABS used as repo collateral to 12% from a minimum 2%. In addition, there is a further 5% haircut (5% of 88% being 4.4%) on ABS created and kept on balance sheet, making a total of 16.4% in such cases.
The amendments were clearly designed to bring the scheme back to its intended purpose, and exclude the likes of Macquarie's Australian car loan deal which some viewed as being exclusively designed to "game the system".
What are the lessons from this?
-Even with a haircut of 16.4%, 83.6% of cheap money is still available;
-Covered bonds attract a much lower haircut, but are still eligible as repo collateral with the ECB
I shall have more to say on the attractions of covered bonds on another occasion.
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Most of us (especially those with school-age kids!) have now had our holidays and are back in the saddle.
There were no big surprises over the summer: most issuance was "structure and hold" either for ECB repo fodder or to speed up future issuance when liquidity returns.
One asset class which has suffered is the SME CLO market, particularly German deals. These have been put together in the past few years as pools of 30-60 loans originated with the express purpose of securitisation. Not particularly "granular", and in many cases subordinated loans, they have suffered from both defaults and more conservative rating approaches this year.
There's another problem on the horizon: these are term loans with several years to run, but there is a significant refinancing risk.
How do we finance SMEs and other companies, then?
I am still positive on trade receivables financing. These are much shorter and more diverse assets which throw off lots of cash. No TR deal has ever been downgraded (except 3 cases due to counterparty downgrade)-unlike many other asset classes!
Many people still associate TRs with commercial paper conduits. This was de facto the case whilst conduits could issue cheap paper, but to say that TRs can only be financed via ABCP is to miss the point by a mile or more. There are many investors who are interested in well-diversified, high-quality paper which generates lots of cash and has the lowest Basel II capital requirements-down as low as 0.56%
And companies who have few alternative sources of funds will pay a good yield.
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