If you asked regulators in 2008 which financial instrument they most wished had never been invented, odds were that they angrily splurted a three-letter acronym linked to securitizzation. The practice of bundling up income streams such as credit-card and car-loan repayments, repackaging them as securities and selling them on in “tranches” with varying levels of risk once seemed like enlightened financial management. Not so after many a CDO, CLO, ABS, MBS and others (see table) turned out to be infested with worthless American subprime mortgages.
Find the same regulator today and he is probably devising a ploy to resuscitate the very financial vehicle he was bemoaning five years ago. Enthusiasm for the once-reviled practice of transforming a future income stream into a lump sum today — the essence of securitization — is palpable. In Britain, Andy Haldane, a cerebral official at the Bank of England, recently described it as “a financing vehicle for all seasons” that should no longer be thought of as a “bogeyman.” The European Central Bank (ECB) is a fan, as are global banking regulators who last month watered down rules that threatened to stifle securitization.
Watchdogs will be pleased that, after once looking as if it was heading for extinction, securitization is making a recovery. Issuance of ABSs (securities underpinned by car-loan receivables, credit-card debt and the like) are at double their 2010 nadir. Issuance of paper backed by non-residential mortgages is up from just $4 billion in 2009 to more than $100 billion last year. There have even been offerings of securities underpinned by more esoteric sources, such as cash flows from solar panels or home-rental income — the sort of gimmick once derided as a boomtime phenomenon. Excluding residential mortgages, where the American market is skewed by the participation of federal agencies, the amount of bundled-up securities globally is showing a steady rise (see chart).
The comeback of securitization is related to the growth in economic activity: in order for car loans to be securitized, say, consumers have to be buying cars. Investors desperate for yield are also stimulating supply: securitized paper can offer decent returns, particularly at the riskier end of the spectrum. More important, though, is the regulators’ enthusiasm.
Why are regulators so keen on the very product that nearly blew up the global economy just five years ago? In a nutshell, policymakers want to get more credit flowing to the economy, and are happy to rehabilitate once-suspect financial practices to get there. Some plausibly argue it was the stuff that was put into the vehicles (i.e., dodgy mortgages) that was toxic, not securitization itself. This revisionist strand of financial history emphasizes that packaged bundles of debt which steered clear of American housing performed well, particularly in Europe.
The need to revive slicing and dicing is felt most acutely in Europe. Whereas in America capital markets are on hand to finance companies (through bonds), the old continent remains far more dependent on bank lending to fuel economic growth. Its banks need more capital, and absent that are the weak link in the nascent recovery because they fail to meet demand for credit from consumers and small businesses.