“Wall Street 2: Money Never Sleeps” is set for wide release on April 23 and while the first movie’s star power (Michael Douglas, Charlie Sheen) return to their roles, there are new characters and talent to provide a fresh update. I can’t help but feel that it would be particularly apropos if the part of Wall Street itself was filled by Washington DC. But before I get into why I say that, I feel there should be a quick primer on where we are. Here’s a quick quote on the state of the credit markets from Suki Mann of SocGen: “Poor secondary market liquidity, scant levels of supply, limited turnover, predominately Street-driven flows, investors sidelined, cash spreads a little tighter generally… It’s hardly a rapturous start to the year.” It’s a pretty good summary of where the markets are now, but the sticking point is Suki is talking about Europe. The similarities of the overall credit markets are similar to the US. But there is one huge divergence in the secondary market that’s nagging me. It’s Silk Road. Silk Road Finance is the first securitization sponsored by the Co?operative Bank in the UK. It’s privately placed with investors and consists of UK prime residential mortgages originated by the former Britannia Building Society. According to the Fitch Ratings pre-sale report, the single-tranched triple-A rated RMBS is a $3.8bn platform. There are few key drivers to the dreamy ratings, for example, the investor redemption option whereas if the notes are not redeemed in full by the issuer on the expected maturity date (March 2015), the note holders have the option to have their notes redeemed by the issuer. (I was not able to establish fully if the massive parent bank Santander is on the hook for the redemptions, but the language appears to support that.) Further, a 15% increase in default rates mixed with a 15% decrease in recovery rates will trigger a downgrade, citing confidence in ratings stability based on solid collateral performance. Nonetheless, my sources say investors are not very motivated by the deal, because of a few structural rookie mistakes, primarily on the interest-rate basis risk swap hedging. And that’s how it worked out, as the deal eventually proved to be so undersubscribed that half became retained. The investor break down of what bonds were sold shows that large investors did not even come to the table. But I’m still excited by the prospect. First of all, its the second RMBS deal out of the UK, this year. the first, the Permanent 2010-1 deal from Lloyds TSB, is an always-expected January series. It even priced in 2009 and 2008. Silk Road is much more exciting as it shows some gumption on the part of Co?operative. Of course, here in the states, we have an excess of non-FHA collateral available for a new issue RMBS. Meanwhile, the best we can do is sit and wait for the news to come that the FDIC is re-opening the RMBS market with its expected $3.8bn platform. And though regulators cite the need for more transparency, one of the investment banks that I’m pretty sure will be book-running this deal is keeping quiet, afraid to even speak off the record for fear of governmental backlash. Governmental backlash? A federal gag-order? Has Washington successfully taken over Wall Street when it comes to securitization? Kevin Donovan at DebtWire, has the scoop and reports that the deal is less than a month away, citing marketing documents. So the info is following established money, and disbursement to the media appears highly controlled. Donovan reports the FDIC will be backed fully by a government guarantee. For one deal, worth nearly $2bn, comprising 103 underlying RMBS securities in receivership from various “failed depository institutions.” The FDIC will retain a 100% equity interest in the deal. On the surface it seems like a creative solution to restart securitization. However, there can be only speculation in light of such lack of transparency. And if the swap option proved enough to damage interest in Silk Road, staying quiet on the securitization of failed bank assets means road to recovery for the private-label RMBS market in the US looks to be much more bumpy.