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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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February 11, 2008 12:01 AM ET
Landov
STANDING UP FOR SECURITIZATION Thomas Renyi, chairman of the Financial Services Roundtable and executive chairman of Bank of New York Mellon, says CDOs are necessary for the liquidity of the financial markets.
For most investment bankers, collateralized debt obligations have become an albatross around their neck, leading to billions in write-downs and frozen credit. But to Thomas Renyi, newly elected chairman of the Financial Services Roundtable, CDOs are essential for market liquidity and are poised to make a comeback. Eventually. In recent months, Merrill Lynch, Bear Stearns and other banks have written off billions in CDO investments that went belly-up. Last month, UBS announced it had taken a $14 billion charge for faulty investments in the subprime market, leading to a record loss at the Swiss bank. And “there are more shoes to drop,” Mr. Renyi said, though he added that liquidity is much better than it was 90 days ago. Wall Street's heavy losses have made securitization a dirty word, as lawmakers and analysts in part blame the credit freeze on banks' eagerness to package subprime mortgage loans into complex products. But securitization has played an essential role in the economy's growth in the last few years and will continue to generate liquidity, Mr. Renyi told Financial Week, noting that markets—and not Congress—should and will take the lead in curbing abuses. Both Mr. Renyi, who also serves as the executive chairman of the Bank of New York Mellon, and roundtable president Steve Bartlett said the market will reform how CDOs are valued, because otherwise the products—which still represent a sizable portion of many banks' holdings—will not be salable. “That's what has happened today. The CDO market today is absolutely at a standstill,” Mr. Renyi said. “[But] the pendulum will swing back.” That's not to say Mr. Renyi doesn't acknowledge that securitization has had its share of problems. “The valuation of the underlying assets is fairly straightforward, but the way they have been structured, the complexity of the structure, makes the valuation as a package very opaque,” Mr. Renyi said. “That needs to be changed. That just simply will not work.” He should know. Earlier this month, Bank of New York Mellon took a $118 million write-down on its CDOs, about 47% of their total value. In the third quarter of 2007, the bank acquired $375 million worth of asset-backed securities, $174 million of which it sold at a loss in the fourth quarter. Bank of New York, where Mr. Renyi was recently CEO, merged with Mellon Financial last July. Not only will securitization stick around, according to Mr. Renyi, but so will mark-to-model, the accounting method used to value complex CDOs. However, accountants will likely make more independent appraisals of the mark-to-model approach, he predicts. For the past six months, roundtable members, which include Citigroup and Merrill Lynch, “have scrubbed everything in sight, and some things that are in the closet” to ensure the accounting and valuations are accurate, Mr. Bartlett added. For their sake, the scrubbing better pay off. The Federal Bureau of Investigation is reportedly investigating 14 companies for accounting fraud related to securitized subprime mortgages, and Morgan Stanley and Goldman Sachs recently admitted to agency probes into their securitization business. Under legislation proposed by the House Financial Services Committee, investment banks could also face liability for bad loans they purchased and repackaged. The roundtable, along with many Wall Street lobbyists and conservative groups, are planning to fight the bill, introduced last fall by committee chairman Rep. Barney Frank (D-Mass.), who has said there needs to be some kind of “regulatory catch-up” to deal with securitization problems. “The issue we have here is not securitization, not necessarily the activity of the investment banks or the [credit] rating agencies, which all have a part to play here,” Mr. Renyi said. “Really the issue is the origination of those mortgages, and the regulatory oversight of the mortgage brokers.” Strangely, Mr. Frank may be somewhat of an ally to the roundtable in pushing for some form of principles-based regulation. According to Messrs. Renyi and Bartlett, Mr. Frank has expressed support for the roundtable's proposal that certain principles be adopted and that agencies build rules around those principles. Mr. Frank “is committed to principles-based regulation,” Mr. Bartlett said. A spokesman for Mr. Frank said the chairman is in favor of some kind of principles-based regulation for the financial services industry, but that “now is not the time” for lighter-touch regulation. Further, the system in the United Kingdom—often lauded by supporters of principles-based regulation—still includes rules, the spokesman said. Mr. Renyi said there will always be rules, but that a framework of principles would help apply those rules consistently without adopting the U.K.'s model wholesale. “That would not be appropriate.” FW
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