Happy New Year and may 2012 not suck as much as 2011!
I’ve been on forced hiatus due to issues relating to a trip to Cuba, a woman named Carla and a small golden statue of significant religious value. I won’t bore you with the details.
Now that I’ve been released …err… returned to work, I just got back from the preeminent fixed income structured finance (FISF) conference; the American Securitization Forum (ASF). For those outside of the business, the FISF brought you such fine investment products as Collateralized Debt Obligations (CDOs), Subprime mortgage backed securities, Liar Loan mortgage securities, Commercial Mortgage Backed Securities (CMBS) and synthetic version of all the above.
GROUND HOG DAY: Year 3
Participants of ASF demonstrated cautious optimism of a prisoner believing the governor would free him at any moment. While CMBS, Autos and Credit Cards have come back in a stunted form, non-government residential mortgage backed securities (RMBS) still lack the appropriate economics to get deals done. Many participants complained about the lack of final Dodd-Frank Act rules but CMBS, Auto and Credit Cards are functioning while waiting for the same regulations. RMBS has too much supply overhang to have spreads tight enough to get a deal done. According to Laurie Goodman, Amherst Securities, the US has a 33 month shadow inventory of defaulted & foreclosed upon houses to process before a supply/demand equilibrium can be hit to make deals economic. To make the situation more painful, most bullish participants believe the home prices will decline another 3-5% before stabilizing. (And yes I said bullish!)
BTW, the private residential mortgage backed securities continues to be stalled with two small deals in 2010 and the first deal of 2012 announced just before the convention.
For those having gone to the previous two ASF conferences will seem like Bill Murray’s Groundhog day all over again. I’m thinking of the scene where the main character drops a toaster into his bath.
Members of the ASF have given up on the democrats and had two very pro-business GOP congressmen speak at the conference. In fact both congressman were so pro-business that they willfully forgot about the abuses caused by the industry. While I agree the Dodd-Frank Act has many issues it also has several really good features. Take what works and ditch the rest.
After the colossal market meltdown which lead to the bursting of the credit bubble and implosion of several small countries, the ASF held its 2010 conference in Washington DC as a sign of contrition and to let congress know we’ve learned our lesson and don’t need pesky laws regarding risk retention. In 2011, ASF ventured to Orlando because the business is family friendly and gave Rep. Garrett the forum to espouse his hatred for all things government especially the President, Fannie Mae, and Freddie Mac though he seemed to forget about FHA/VA loans. The time for slinking around is over and the ASF is back in its favorite city, Las Vegas!!
In a bit of delicious irony, the ASF chose to hold the convention in the opulent Aria Hotel. The Aria is located in the new City Center in Las Vegas. The construction of City Center was financed by a loan originated by a large investment bank with extremely loose underwriting standards (pro-forma underwritten and had interest only payments due). This large investment shop placed the loan into its own CMBS and made themselves a good deal of money.
The City Center loan failed as the construction project ran out of money. The equity owner was highly levered and had no interest in putting his own money into the work. The project stalled for over a year until a new partner came with a cash infusion for a significant ownership of the project. Moreover, one of the towers has just been condemned without ever being occupied by the local county. The ASF, having not learned its lesson, holds its conference in the very hotel which represented a shining example of how messed up the originate to securitize model had become.
Naked Bond Bear