As Washington contemplate the future of financial services
regulation, one hot-button issue is how to handle the complex debt
instruments that are at the center of the credit crisis. One idea
bubbling up from the blogosphere via Bloggingstocks and CNBC: outlaw securitized products such as collateralized debt obligations or collateralized loan obligations.
Superficially,
this sounds like a good idea. After all, many of the toxic assets
weighing down bank balance sheet are securitized products like CDOs,
CLOs or mortgaged-backed securities. But, like so much of the rest of
finance, securitization is not a black or white issue. Should the rules
of the securitization game change? Absolutely. Banks should keep more
of these products on their balance sheet and put capital behind them.
There should be limits on leverage. And of course both the credit
ratings on the debt and the risk models applied to CDOs, CLOs and MBSs
should receive greater oversight and testing.
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However, treating securitization as if it were some sort of
financial crime like a Ponzi scheme misunderstands both the good it can
produce and the beneficial role it can play. Banning it would be akin
to suggesting we outlawed IPOs after the dot-com bubble because so many
flopped. Moreover, try to imagine what we would lose over the long term
without securitization. Without these products you're not only going to
see a lot less mortgage origination and higher prices, but also far fewer
student loans and credit cards, as well as a serious decline in the car
finance business and in the car industry. (Indeed, all those businesses
are getting squeezed now because securitization has been dead for
months, which explains why the Federal Reserve is rolling out a huge
effort to restart it.)
Securitization is a tool banks and other financial services firms
use to generate liquidity, which allows them to lend. If we simply
outlawed it, we'd be rolling back the availability of credit by
decades, just as the government is spending huge sums to restart
student lending, credit cards and mortgages, and of course to save the car
companies. Bernie Madoff was a crooked money manager. That doesn't mean
we should ban money management.
Outlawing securitization would mean an end to the American middle-class lifestyle. We should be careful what we wish for. - Matthew Wurtzel
