--Joy Wiltermuth
Attendees at the ABS East general session Tuesday were on a two-hour security lockdown at the Fontainebleau Hotel while President Obama’s departure was coordinated. That gave the captive audience plenty of time to focus on the “Lessons from the Financial Crisis: Required Steps for Recovery.”
There have been plenty of lessons. Brian Lancaster, head of mortgage, commercial and asset-backed securities strategies at RBS Global Banking & Markets, said the industry magnified and created demand on its own. “The whole thing actually fed on itself. The doubling and quadrupling of leverage blew up the whole world.”
Anatoly Burman, senior managing director at Aladdin Capital Management summed up past problems in a word. “Greed. If you trace the history of the market, the mortgage market was very slow to get started,” he said. “But easy credit and loosened lending guidelines gave us loans that don’t respond to reality.” Burman instead suggested harkening back to the ‘80s for a way back to sound fundaments, adding, “The TALF program is basically pushing technicals way beyond the fundamentals.”
Another big issue discussed was greater transparency. “It is clear the structures became far too complicated for investors to understand themselves,” said Patrick Tadie, executive v.p. at BNY Mellon. “Less complexity is very important going forward, as well as greater access to loan level data.” John Devaney, ceo at United Capital, agreed. “I think the documents need to start to be written in English, so people can actually understand them,” he added.
The role of rating agencies in the crisis was also discussed. “Rating agencies were under the same delusion as everyone else,” said Daniel Curry, president at DBRS. “The downgrades certainly shocked the market.”
Looking ahead, the industry is working to figure out what new regulation might look like. “Skin in the game is obviously important, but it is not a panacea,” Lancaster said, noting that regional banks already holding the administration’s proposed 5% retention risk on loan originations are still seeing pain. “It’s about how long you have skin in the game, and [if lenders] lever it up in two years, than they won’t care about the long-term of the asset.”
Burman said deleveraging will likely be the most important indicator on improved fundamentals. “One lesson that should have been learned is to buy cash flows, not loans,” he said. “There really isn’t that much more to understand.”