American Badass: Securitization Lobby Revisited

The moniker "American Badass" evokes a rich vein in US (marketing) history, from outlaws of the Wild West to today's more commercialized varieties such as self-styled trailer trash Kid Rock and pro wrestling's Undertaker. From what I gather, the Undertaker has used Kid Rock's song entitled such to make his ring entry on a motorbike. Today, however, I will discuss the true American badass. This is not the time for me to semantically parse what being "badass" really is. Nevertheless, posing to sell records and faking ring violence pale in comparison with causing $2.2 trillion in financial losses worldwide (and counting) as well as fostering conditions for global recession. If you want dudes with major b-b-b-bad mojo, they are neither tattooed nor wear leathers. No sir, those who've succeeded in inflicting mass misery instead come in suits and ties via the secrutization lobby.

Blogs usually have their running gags; mine happens to be the securitization lobby [1, 2]. If their stated mission was to "screw up the world," I wouldn't have raised an eyelash. Representing virtually all major financial services firms operating in America, these fine folks are quite unrepentant in their activities. Thumbing their nose at the rest of us, they will once again hold a megabuck annual meeting at the Venetian, the fake Venice of Las Vegas. The symbolism of gambling with others' fortunes is apparently lost on them despite some $10.2 trillion in destroyed American wealth. If that's not enough for you, have a look at this article from the American Securitization Journal entitled "Why Securitization Still Matters" (I am not making this up):

Securitization has become the scapegoat of the credit crisis. Once a word which carried no meaning for the general public, it now enjoys widespread notoriety and has been held up as the ultimate cause of America’s fve-year credit boom-turned-bubble bursting. But just because the crisis first took hold in the mortgage-backed securities (MBS) market doesn’t mean that we can, or should, pin all the market’s current troubles to its lapels.

By now it is clear that the excess leverage built up throughout the fnancial system was widespread and unsustainable — and would have unwound sooner or later, somehow or other. That has not stopped politicians, some regulators and market pundits from pointing the finger at financial engineering as a root cause of the crisis.

It may be a tempting target, especially 18 months or more into a broad credit crunch. But similar jibes were not thrown at the equities market after the Internet bubble burst, or at bond and loan markets whenever defaults have hit hard there. Then, it was called poor investing, or bad risk management or bad lending. Te instruments themselves, though, were never seriously attacked.

No doubt there was a lot of bad securitizing of bad loans for a couple of years — not least in subprime-backed mortgages bonds and collateralized debt obligations (CDOs). But the basic technology has worked as it was supposed to. Scott McMunn, head of credit investment at RBS Asset Management, argues that subprime-heavy U.S. residential MBS and asset-backed CDOs account for almost all the losses attributable to structural defects in securitization — two relatively new asset classes for which there was little useful historical data. In contrast, he notes that although spreads have blown out for other asset classes — student loans, automobile loans and credit cards — the underlying credit performance is consistent with historical experience, which is based on a much better set of data. Defaults on consumer credit increase when the economy heads into a recession regardless of whether the loans are securitized. Even collateralized loan obligations have performed as expected in times of stress. “The accusation that securitization is flawed is wrong,” McMunn says. “The flaws came from two asset classes that evolved very quickly in a short period of time.”

See? It's "other badass dudes got away with the Internet bubble, so why can't we?" The rest of the article recommends reflating the securitization machine, albeit with more oversight as other securitized products weren't so bad after all--they're just being inappropriately tarred by subprime. I guess being badass also involves pushing a troubled agenda as if nothing had happened. They conclude:

Once the banks regain their footing, the more robust infrastructure being mapped out by market participants ought to restore and underpin investor confidence. Then securitization will be poised to resume its rightful role in providing credit, the lifeblood on which economic growth depends.

I've always been troubled by this American debt culture and the idea that what it takes for the recession to end is...piling on even more debt as facilitated by securitization and other fancy schemes. It suppose others have different ideas. In their dreamiest of dreams, CDO-squared takes the starring role, not Kid Rock or the Undertaker. Badass, indeed.