By Marianne Nardone
The importance of underwriting standards in the securitization market and the need to fully understand the risks and volatility of the securities to ensure that history doesn't repeat itself will be the key topics discussed at the "Lessons from the Financial Crisis: Required Steps for Recovery" panel today.
Panelists agreed that the basic lack of analysis, understanding and due diligence were the main ingredients leading to the crash in the collateralized debt obligation and asset-backed and mortgage-backed securities markets. "I'm not sure that a lot of investors were analyzing anything really," said panelist Patrick Tadie, executive v.p. with BNY Mellon. Tadie will also discuss problems with the overall lack of transparency, and how lessons should be learned in terms of underwriting guidelines and researching both the originator and the servicer. He underscored the importance of tracking how each loan performs over time, instead of just observing a sample. "Investors bought bonds that they didn't understand, without knowing the strength and quality of the underlying servicer of the loans," he said.
Panelist Daniel Curry, president of rating agency DBRS, echoed the sentiment and said the lack of knowledge was particularly bad in the CDO market. He said he will focus on what people were not doing that led to the crisis. "A lot of CDOs were done by people who were very good at math, but were over-rating the risks and volatility of the assets. If they don't understand the risk and volalitility, you wonder whether they understood anything," Curry said. Panelists will drill down on the importance of representations and warranties, as well as what Curry said was an assumption that performance, particularly within ABS, was far more precise than was actually the case.
At both the securitization and transactional level, panelists will talk on the importance of asset quality, and how a lack of analysis hurt the market. Particularly, Tadie will look at what types of properties were in the investments and whether accounting firms that were responsible for analyzing the investments understood the results. Tadie will also hold up the rating agencies as to whether they performed reviews on a regular basis, such as monthly, and if they updated these reviews. He stressed the importance and lessons learned from investigating why some securitizations didn't perform.
Panelists added that a number of initiatives and organizations have had a positive impact on the market--namely the Obama administration's loan modification program and calls for greater disclosure. Panelists will talk about the impact of the American Securitization Forum's Project Restart, as well as initiatives by the Federal Reserve Bank that have helped to increase ABS issuance. "These have been a big help in terms of getting folks on the same page," Tadie said.
In terms of looking ahead to 2010, panelists will talk about the fact that, despite what the industry has been through, the ABS market in particular has been on a tear--with most firms seeing increased issuance. "Deal volume has been crazy," said panel moderator John Arnholz, partner with law firm Bingham McCutchen. Arnholz said he will flesh out whether the "originate to securitize" push was part of the problem, and going forward whether there are certain assets that simply shouldn't be securitized. "If so, should issuers be required to keep skin in the game? And how much of what happened was a result of events unrelated to the securitization markets?" Arnholz asked.
Finally, panelists will discuss the increased due diligence that has been performed on existing deals and the need to tap into the range of resources available to continue to reduce risk and boost understanding. "This didn't happen because of a lack of resources. These resources might affect your margin, but it's still hard to understand because people were getting paid reasonably well," Curry concluded.