Subprime RMBS, CDOs 'Extinct,' Says Moody's
Some interesting comments made in Australia Thursday are catching the eye of some market participants, as Moody's Investors Service managing director Jennifer Elliot told conference attendees in Melbourne that more than a few structured finance vehicles are likely headed towards extinction. Subprime RMBS and ABS CDOs are gone, and never likely to return from an issuance standpoint, Elliot said in conference remarks, according to a report from Bloomberg News. "These are products that have just disappeared and we certainly don't expect to be coming back," Elliott is quoted as saying. "There is an overwhelming level of investor concern about what will happen in credit markets, as opposed to what has happened, that is impacting issuance." Her remarks underscore an issue that's received little attention this far; the idea that where credit markets are headed has as much to do with wiping out certain vehicles as does what's already taken place over the course of the past year. And, certainly, market conditions suggest neither CDO nor private-party RMBS issuance is likely to return soon. Thus far in August, there has been absolutely zero non-agency MBS issuance after just $700 million issued in July, according to trade publication Asset-Backed Alert; the non-agency MBS market essentially disappeared in October of last year. The publication also reported that worldwide CDO issuance has all but dried up, as well: just 1.5 billion in CDO issuance has been recorded in August so far, compared to the $21.8 billion recorded one year ago. In July, just $6.1 billion in CDO issues were pushed out the door, compared to $14.7 billion in June and $35 billion one year earlier. "We have seen far more contagion of risk than anyone anticipated,'' Elliot said, according to the Bloomberg story. (You think?) Factors pushing change In particular, pending accounting changes regarding the off-balance sheet treatment of securitizations via two previously obscure (and equally obtuse) accounting standards known as FAS 140 and FIN 46R seem likely to reduce issuer enthusiasm and make it tougher, if not impossible, for issuers to manage large-scale securitization efforts. Further, analysts have suggested that as much as $5 trillion would need to come back on the balance sheets of various financial institutions as a result of the proposed changes. Treasury secretary Henry Paulson, as well as Fed chief Ben Bernanke and FDIC chairman Sheila Bair, have begun pushing covered bonds as an alternative to securitized trusts. The move to establish a covered bond market in the U.S. -- until recently, a vibrant covered bond market existed in Europe -- comes as regulators likely have reached to the same conclusion as Moody's regarding the future of much of structured finance surrounding mortgages. HW's Linda Lowell will explore the future of securitization in HW's inaugural print magazine; subscribe today for an inside view of the market.