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February 13, 2009 2:00 am
One question kept recurring during this week's grilling in Washington of Wall Street's top chief executives: why, when banks have received billions of dollars of taxpayers' money, is it harder for people to borrow?
Despite assurances from the bank chiefs that lending continues - and in some cases has increased relative to last year - the reality is that, even if all the money received from the government is lent, the availability of credit will remain tight.
A key reason for this is the near-total collapse of the market for securities backed by assets such as payments on credit cards or loans made to finance university educations or to buy houses or cars.
So far this year, there has been virtually no issuance in the asset-backed or securitised markets. According to Dealogic data, there has been a mere $2bn of bonds backed by auto loans and student loans. In 2007, before the credit crunch took hold, more than half of the $5,655bn borrowed in the US credit markets was financed through asset-backed securities.
Although banks in many cases arranged the original loans, they typically repackaged them and sold them as rated securities to investors. This allowed them to make more loans than the size of their balance sheets would allow, and this financing mechanism has now broken down.
Such securities, particularly those backed by risky mortgage loans, have lost trillions of dollars in value. This has frozen the market for the securities and contributed to further falls in house prices and sharply reduced the availability of credit to consumers.
With the markets dysfunctional and valuation of many of these assets extremely difficult, people and companies are finding it hard to borrow money, which makes the recession more severe.
The Congressional hearings came just as the biggest annual securitisation industry conference ended in Las Vegas, a city hard-hit by the economic downturn where the crowds of previous years have thinned considerably.
Reflecting the many lay-offs that have hit the sector - as the legions of lawyers, bankers and sales staff previously employed to churn out thousands of deals are redundant - the numbers attending the American Securization Forum event fell to about 3,600 from 6,000 last year.
The US government has recognised the importance of the securitisation markets to the availability of credit, and a key component of its plans to restore the financial markets is a plan to allow the Federal Reserve to lend up to $1,000bn to hedge funds and other investors to buy asset-backed securities.
The lending, the initial terms of which look favourable, will pump up the returns hedge funds can get by buying securities backed by consumer loans. The first deal eligible for this programme - called the Term Asset-backed securities Loan Facility (Talf) - is expected in the coming weeks. This week, the size of the scheme was increased from $200bn to $1,000bn.
"The excitement around the unveiling of the Talf rivals the Acadamy Awards or the Superbowl for this audience," said Jason Kravitt, senior partner at Mayer Brown, at the Vegas conference.
Yet even though there were hopes that the Talf plan could plug part of the funding gap, estimated to be worth more than $2,000bn, many in the industry worried that it would, at best, create a parallel market that did not address the bigger concerns about existing troubled, or toxic, assets.
"The Talf will result in a two-tier market and will not do anything to help traditional, real money investors," said Mary Kane, director at Citigroup. "This will hinder the recovery of the markets."
The securitisation market boomed because so many of the securities that it sold had solid, triple-A credit ratings attached to them, as well as a slightly higher yield than other "safe" investments.
A blind belief in the safety of those credit ratings - a faith that has been shattered by a wave of downgrades as underlying loans proved riskier than expected - has resulted in trillions of dollars of losses for banks holding these securities and many other investors, too.
As a result, funding costs are now so high, that the market is no longer viable. Many investors would be reluctant to buy new deals, even with high yields, because of the uncertainty about how the US government plans to deal with the trillions of dollars of toxic assets.
This week, Tim Geithner, Treasury secretary, said a plan was being developed for a private-public partnership to buy toxic assets, and that this could result in $1,000bn of buying power. The lack of details have left the markets hungry for more.
"We are all waiting for some very clear policy direction and are operating in a somewhat paralysed state," said Ralph Daloisio, managing director for structured finance at Natixis.
Hedge funds have not traditionally been big players in the securitised market, where demand was fuelled by investments from banks' off-balance sheet vehicles, and traditional investors.
Even with plans to simplify future securitisation and wipe out sloppy underwriting, the industry expects a long haul.
A survey of 450 conference participants found that most did not expect a return to "normal" until at least 2011.
"The market has taken 25 years to build and the rebuilding process will take some time," said Andrew Peisch, head of banking and origination at Deutsche Bank.
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