BY Niamh Ring
Reviving the asset-backed securities market requires a back-to-basics approach by market participants as well as measured government intervention, said panelists set to discuss the issue at the conference today. "Thorough underwriting, thorough vetting of transactions and renewed emphasis on fundamentals" are all necessary tools to restoring investor confidence, said Sanjeev Handa, TIAA- CREF's head of global public markets, and a panelist.
Marc Nocart, co-global head of securitisation at Paris-based Société Générale Corp. & Investment Banking, who will moderate the panel, agreed that a return to "classical securitization techniques" should make investors feel safe. But he also noted that in the current environment even triple-A rated bonds face a tough market.
Handa, whose division manages roughly 40% of the New York-based TIAA-CREF's total $350 billion in assets, said the market needs more transparency, as well as iron-clad contracts, and the restoration of faith in the ratings agencies. Of the latter, he said, "For the most part, I think they've done a good job, but in recent years they've come under considerable scrutiny for some of their ratings actions." To regain investor confidence, the agencies need to make their analytical processes more transparent, he said. In establishing ratings, they should focus as much on "qualitative factors," such as the financial health of an institution, as on "quantitative factors", he added.
Nocart said that the ratings agencies are only part of the story. "It is a sign of our times to find one guilty party. You cannot say it's only one party."
In Europe the entire asset-backed securities market has been "under huge political and media pressure and held responsible for the crisis," said Nocart. "It is partially true for some instruments, but not for all of them. In my mind, the majority are safe to revive."
But restoring liquidity remains key and Nocart suggests that the market will need help from the European Central Bank, possibly through a program similar to the U.S. government's Term Asset-Backed Securities Loan Facility, which was launched in March to support the issuance of asset-backed securities in the United States. "There's no other way," he said. "All the financial institutions and the banks need government help."
The ECB has shown some interest in pursuing the TALF route. In a survey that polled 36 European banks released by the central bank last month, the ECB wrote that respondents said it is "vital" that some method be found to restart securitization.
"This points to a solution along the lines of the U.S.-designed TALF program, to repo these securities should they be unable to find a buyer, thus helping to restore liquidity in the markets," the ECB concluded.
If Europe does forge ahead with its own government-backed initiative, Nocart offered one possible solution. He suggested a program where investors would provide 10% financing for triple-A rated securities at the outset, with the banks that originated the paper providing the remainder with backing by the ECB. Nocart said that the ECB could "progressively" reduce its participation level over time leaving the banks to make up the difference.
Handa agreed that programs like TALF should only rely on government support for a finite period.
"TALF I think is good for getting the market started in the near-term," he said. "The market should take proactive steps to be able to function without [it.] The goal is not to have TALF in place in perpetuity."