Performance art, or how to structure ABS
The securitization market generates a mix of excitement and confusion, offering investors a novel way to boost their returns, diversify risks and — not very bold conjecture here — sometimes lose lots of money without quite understanding why.
That, at least, is what a grizzled curmudgeon like me would say. But my friends in the industry assure me that this time is different, really, absolutely, cross my heart and hope to die.
Things have at least moved on a bit in China. I was at IMN’s flagship securitization conference in Macau this week when I was reminded of an old tale a banker once told me. He had been mandated to work on one of the first crop of non-performing loan securitizations in the country. There was just one catch, as a friendly regulator made clear.
“You need to be very cautious here,” the regulator said. “This market will be very important.”
“Of course,” my friend said. “We’ll structure it with care.”
“The assets need to be good, too," he was told. "Performing very well.”
This presented something of a conundrum for my banker friend, who was wedded to the rather old-fashioned notion that non-performing loans tended not, in fact, to perform very well. The clue was in the name, he thought.
But it was China, and it was a Chinese regulator, so he did his best, giving some hungry young swot on his team the unenviable task of picking the best performing non-performing loans for the asset pool. Jesus did, indeed, weep.
I am assured that this sort of thing doesn’t happen anymore. Alas, such assurances haven’t always performed very well in the past.