Sector resized and reshaped
It is unusual for large parts of the capital markets to shrink sharply. Yet that is what is happening in the global structured finance markets. This year alone, forecasters predict there will be at least $400bn less of structured finance swirling around the global financial system than in 2009. This shrinkage will continue for the foreseeable future, according to analysts at JPMorgan. It will include asset-backed securities, which repackage vehicle and credit card loans, commercial mortgage-backed securities, residential mortgage-backed securities and collateralised loan obligations, which turn bank loans into bonds. There are three main reasons behind the decline: • the disappearance of special investment funds fuelled by leverage that were huge buyers of structured bonds; • loss of trust in credit ratings after hundreds of billions of dollars of “safe” triple A bonds proved virtually worthless; • and the demise of bond insurance that guaranteed debts and boosted ratings to triple A levels. A broader question is also being asked: do even the biggest and most “sophisticated” investors need to be protected by regulations that would limit the kinds of products banks can sell them?