I like Portfolio blogger Felix Salmon. Unlike others enthralled by its magic, he doesn't start his
defense of securitization by suggesting that, well, maybe I just don't quite understand how it works. On the contrary, he kindly says that I am "no rube," thanks to my past acknowledgment of some pro-securitization arguments.
After that, though, he reverts to the familiar "here's-how-it-works" mantra, using an appropriately complex analogy about a money-catching hat to celebrate the conversion of an illiquid asset into ready cash.
OK, I get it, it's cool. But simply reiterating how clever the whole idea is ignores the tortured accounting, the questionable residual estimates, the badly conflicted "true-sale" charade by lawyers and credit rating agencies, the subversion of the bankruptcy code, and the powerful banking lobbies that are needed to prop the whole business up.
Salmon also says "it's really no big deal" that Aspen Technology had to restate several years of financials after accidentally regaining control of securitized receivables. After all, he says, there was no net economic effect. Aspen simply moved some fungible amounts around on its financial statements.
In the finance world I write about, that's bad enough. I haven't researched the impact Aspen's error had on the holders of its receivables-backed securities. But in theory, the rating — and therefore, the value — of those bonds should have dropped when Aspen regained control. That's a real economic loss for investors. And what if Aspen goes bankrupt and lays claim to its receivables, as LTV Steel did seven years ago?
I typically cover corporate securitizations, not mortgages, but I did a double-take when I read Salmon's last line. Securitization, he says, is "a way of lowering borrowing costs for companies with bad credit. Which has got to be a good thing."
It can be a good thing. But if a company has bad credit, its borrowing costs ought to reflect that risk. Sure, there are clever ways around that, but doesn't that sound like the scenario that caused the whole subprime mess in the first place? |
Video
