One quote jumped out from the comprehensive analysis of the securitisation markets by Gillian Tett and Aline Van Duyn on Tuesday:
“The securitisation market is absolutely not dead. My team is busier than it’s ever been,” says Geoff Smailes of Barclays Capital.
What does that mean? Has Smailes’s team only just been constituted – meaning it has no real history in terms of the word ‘busy’? After all, the securitisation market in the US went from $2,500bn in 2007 to virtually nothing in 2008.
Maybe this BarCap team has radically shrunk in size, meaning everyone that has survived has to run around doing ten times as much work.
The more likely explanation is that Smailes and his colleagues are working at full pelt to supply the BarCap PR machine with full details of its “smart securitisation” scheme, which may yet help resuscitate the former securitisation industry more generally.
The explanation of ‘smart securitisation’ is worth dwelling on for a moment. The bank’s explanation, as relayed by the FT’s Patrick Jenkins, is as follows:
BarCap’s structures involve the pooling of assets from several clients into a secured financial product that can be sold to other investors and rated by a credit rating agency, potentially reducing the capital allocated against the assets by between 10 per cent and 50 per cent.
These new mechanisms are in some respects similar to discredited structured products such as collateralised loan obligations, which were widely blamed for fuelling the financial crisis. But the schemes’ backers argue there are two significant differences. First, they involve the securitisation of banks’ existing assets, rather than of new lending. Second, bankers argue that the new products do not disguise the transfer of risk.
“This is the world of smart securitisation,” said Geoff Smailes, managing director of global credit solutions at BarCap. “It’s not securitisation for leverage and arbitrage purposes any more. This is all about restructuring portfolios of assets to achieve risk, capital and funding efficiency in a transparent and less complex way.”
How’s ‘smart’ is that? If you reduce the amount of capital underpinning a particular asset, then the net effect is to increase leverage applied. And if you are resorting to financial engineering to reduce the amount of capital that regulators would otherwise require to be posted against the asset – well, that would appear to be capitalising on a regulatory imbalance. ‘Arbitrage,’ for short.
Or maybe we are just being a bit dumb here.
Related links:
This SIV shall come again – FT Alphaville
“Smart” securitisation – Lex
A formula to fix – FT “Big Page” analysis