Banks "Reinvent" Securitization to Reduce Capital Costs

According to the FT, the day that libertarians fear, one where government intervention squelches innovation on Wall Street, is still far away. The FT has a front page article detailing how investment banks are attempting to rejigger securitization in order to reduce the capital cost of risky assets on banks' balance sheets. The schemes, referred to as "insurance" at GS and "smart securitization" at BarCap, involve pooling assets from several clients into a secured financial product that can be sold to investors and rated by a credit agency in order to reduce capital costs by 10-50%. Something about this sounds very familiar, hmmm, scratching head...oh yeah! I've got it! It's exactly what they were doing before (presumably we can now safely refer to its predecessors as "dumb securitization" or "AIG-style insurance") which virtually caused our financial system to collapse on itself. "But wait!" bankers argue. "This time it's completely different! This time we'll be using existing assets, instead of new lending and the products do not disguise the transfer of risk!" They cry in unison. "Because last time we were trying to deceive everyone by pretending there was no risk and we succeeded! Ha! Ha! Fooled all of you suckers! Oh, wait a minute, don't print that last part. Turn the microphone off!"

Now, I have no problem with securitization, particularly on new lending. In fact, I'm fairly certain, with the exception of all the FHA-condo lending and the 125% LTV loan refis recently introduced by the risk averse folks over at HUD, that recent lending has probably been extremely well-underwritten. In fact, I'm confident that any underlying collateral in a securitization underwritten during a period of time when bankers were dropping loads in their pants on a daily basis because they were terrified the world was coming to an end is going to perform very well. What I don't approve of is the shoveling of old refuse from banks' balance sheets into newly concocted garbage which is then sold to some endowment or pension fund that's desperate to make up for the 50% losses they've suffered in the past year just so that banks can lever up again. The PPIP was created so that banks could get a price for their toxic waste and unload it. The banks chose not to participate because they didn't like the prices their assets would command even with government-sponsored leverage, and preferred to raise equity into a short squeeze and hoped to ride out the economic storm. So now they are concocting schemes to game the system. Let's hope that this time our regulators are awake and paying attention.