Tag Archives: Asset-backed security

Markit Launch Liquidity Metrics for Euro Loans

The information services company, Markit, will be providing liquidity metrics and composite liquidity scores for European ABS and leveraged loans that are covered by its pricing services, according to a press release.

“With the addition of leveraged loans and European ABS, our liquidity metrics now cover a broad spectrum of sectors in fixed income.”

Armins Rusis


The information services company already measures liquidity for CDS and evaluated bonds. By adding European ABS and leveraged loans, Markit is offering clients a more comprehensive view of the liquidity of financial assets across the fixed-income sectors, the company says.

Markit’s study of the liquidity scores for leveraged loans showed that liquidity has steadily improved in 2010.

Globally, this year the number of loans with Markit’s score for the lowest liquidity level has dipped 13.6%, while the number of loans in Markit’s categories for the highest two liquidity levels has risen 133%.

“Liquidity metrics provide new perspective for portfolio managers studying opportunities in the over-the-counter markets,” says Armins Rusis, global co-head of fixed income at Markit.

“Our ability to provide insight on the average size associated with dealers’ bid-offer quotes, for example, is extremely valuable to clients who, until now, have not benefited from this level of transparency. With the addition of leveraged loans and European ABS, our liquidity metrics now cover a broad spectrum of sectors in fixed income.”

Markit’s liquidity metrics for European ABS provides enhanced liquidity information for the 4,400 ABS securities that are part of Markit’s European ABS pricing service.

The firm’s new European ABS liquidity score is a composite measure of the observable liquidity of a security that is based on the depth of pricing contributions as well as the number of market quotes.

Scores will range from 1 to 5, where 1 means having the highest liquidity.

Meanwhile, Markit’s liquidity metrics for loans will cover the 6,400 syndicated loan facilities that are included in Markit’s loan pricing service.

The new service will give clients the access to the indicative bid/ask levels, the market depth, the number of sources quoting each facility, the frequency of quotes as well as the number of quotes.

These include size, average size and average bid-offer spread.

For each priced asset, the liquidity metrics for loans are complemented by the information provider’s own composite liquidity score, which brings together data on market depth, bid-ask spread, average size and frequency of quotes into a single score from 1 to 5, where 1 would indicate the highest liquidity.

Liquidity metrics will assist sell-side and buy-side institutions in risk management, product control, compliance and trading purposes.

Related by The Swapper:

Global Forex Trends

Why The Nervousness In Telecoms?

Spec-Grade Liquidity Worsens

Unintended Consequences of Reform Hinder ABS Issuance

US Bank TruPS CDO Defaults Near 14% on Deferral Transfer Spike

Big Banks Block OTC Clearing in “Proxy War”

S&P’s: Future Is Unclear for European RMBS

*

1 Comment

Filed under Technology

Rating Agencies Have Stopped Rating – Bond Markets Shutting Down

The three dominant credit-ratings providers have made an urgent new request of their clients: Please don’t use our credit ratings. The odd plea is emerging as the first consequence of the financial overhaul that was signed into law by President Obama on Wednesday.

“The repeal of Section 436(G) of the Securities Act of 1933 is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions.”

Barclays Capital


It already is creating havoc in the bond markets, parts of which are shutting down in response to the request, The Wall Street Journal Reports.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days.

This is the direct consequence of a new law, in particular a small paragraph that made it into the law in the very last moment.

Yesterday morning, the Econotwist’s subsidiary site “The Swapper” reported:

“The repeal of Section 436(G) of the Securities Act of 1933 — what the Wall Street Journal in an article this morning called an “unintended consequence” of the Dodd-Frank Wall Street Reform and Consumer Protection Act — is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions,” according to Barclays Capital analysts.

“Thus, disclosure of ratings in offering documents of publicly registered securitizations is required, but consent of the agencies to include them is not,” Barclays says.

With difficulty assessing this new liability, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have already pulled back from the new-issue securitization market, The Swapper reports.

Barclays analysts expect this to impact consumer ABS more than residential credit ABS, where issuance volumes have been generally lower and issuance that has come to the market has generally been privately placed as 144A deals.

Go to The Swapper to read the rest of the article.

Rigid With Fear

Now not only the agencies have a big problem. The issuers are also rigid with fear, the wsj.com, writes.

Many companies that were in the process of securitization of their loans are now holding back.

The registration with the SEC is on many financial products – especially those composed of consumer loans such as mortgages and car loans – a written evaluation by an agency requirement.  These are now refused.

Liable For Their Ratings Decisions

The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately.

The companies are now refusing to let bond issuers use their ratings until they get a clearer understanding of their legal position and no one knows how long this will take.

Many structured products cannot be issued now, as the law obliges them to include a rating in the documentation.

That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down, The Financial Times Deutchland reports.

“We are experiencing a standstill,” Edward Gainor, one on asset-backed securities specialist lawyer, says .

While there have been were traded bonds worth $3 billion over the last weeks, there were no new issues this week, according to The Wall Street Journal.

How To Create A 3 Trillion Dollar Bubble And Burst It

SEC To Take Action Against Moody’s

E.U. Prepared To Set Up Own Rating Agency

Moody’s May Be Downgraded by Standard & Poor’s

Fitch Gives EU Bailout Tripel-A Rating

ECB Makes Rating Agencies Irrelevant

Killing My CDS Softly

*

Enhanced by Zemanta

1 Comment

Filed under International Econnomic Politics, National Economic Politics

Is Mark-To-Market Accounting Coming To An End?

Mark-to-market accounting needs to die. It should be stabbed in the heart with a cedar stake, shot through the temple with a silver bullet and then buried under six feet of garlic powder. Like the evil killer in a horror flick, we need to make sure it never gets up off the floor ever again,” Brian Wesbury and Robert Stein at The Institutional Risk Analyst writes in a commentary.

“While we do not agree with everything Ben Bernanke is doing these days, his comments, which finger the impact of accounting rules and conventions on the economy, are right on the money.”

Institutional Risk Analyst


“Commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value.”

Ben S. Bernanke

(February 24, 2010)

It would have been much better for the economy if Chairman Bernanke had been this clear about mark-to-market accounting back in 2008. If he had been, the US might have avoided the Panic of 2008. But it’s never too late, and now that mark-to-market ideology is affecting the ability of the Federal Reserve to exit its quantitative easing, he’s finally onboard.

In November 2007, FASB reinstated mark-to-market accounting for the first time since 1938. This rule uses bids (exit prices) to value assets. So far, so good. However, in 2008, the market for asset-backed securities dried up. The prices of bonds that were still paying in full fell by 60% or 70%, and those losses were often driven through the income statement. This wiped out regulatory capital, caused bankruptcies and created a vicious downward spiral in the economy. In retrospect, it is clear that this accounting rule was a potent pro-cyclical force behind the Panic of 2008.

Finally, on April 2, 2009, FASB allowed banks to use “cash flow” to value bonds when the market was illiquid – exactly like Bernanke said last week. This fixed the immediate problems in the system, and the economy and financial markets have been on the mend ever since. In fact, the stock market bottomed on March 9, 2009 – the very day markets found out that Representatives Barney Frank and Paul Kanjorski would hold a hearing to force FASB to change the misguided accounting policy.

However, over-zealous bank regulators are now enforcing their own version of mark-to-market accounting by using the appraisal process. Regulators are forcing banks to write down loan values and increase loan-loss reserves by using appraiser-driven valuations. Yes, that’s right; these are the same appraisers who over-valued properties five years ago. Now, because they often use foreclosures and distressed sales as comparable recent transactions, they undervalue properties.

To the regulators, it does not matter if the loan is still being paid on time. And it does not matter if the lower valuation of the collateral will force an already stressed borrower to come up with more cash. Regulators have decided that they want banks better capitalized and the way they can do that is to reduce the value of a bank’s assets and then force these banks to raise money from shareholders.

This, in turn, is undermining bank lending, hurting small business and making it more difficult to reduce unemployment. The worst part is that it is not necessary. Banks are better capitalized today than they were in the early 1980s when banking losses were significantly worse. Back then, we did not have mark-to-market rules forcing banks out of business; instead we allowed the actual performance of loans to determine the viability of these institutions.

Banks could not “make-up” loan values in the 1980s and 1990s. In fact, more than 2,700 banks and S&L’s eventually failed even though we did not have mark-to-market accounting. Mark-to-market accounting does not solve problems, it creates them by acting as a pro-cyclical force. Milton Friedman understood this and wrote about the devastating link between mark-to-market accounting and Great Depression bank failures. Franklin Delano Roosevelt finally figured this out in 1938 and suspended the rule. The Depression ended soon after. Coincidence: We think not.

Similarly, in 2009 with mark-to-market rules in place, two stimulus bills totaling over $1 trillion, a $700 billion TARP, zero percent interest rates, and trillions in other Fed and Treasury actions did not turn the market around. Private money did not flow into the banking system until FASB finally allowed cash flows to be used to value assets (when markets were illiquid).

Once the rule was changed, banks were able to raise $100 billion in private capital. And since then, TARP has been repaid by institutions that were forced to take it, while PPIP never got off the ground. It was mark-to-market accounting that created the Panic of 2008, not a failure of the capitalist system.

But these overly strict accounting rules still have many adherents, bank regulators among them. And as long as it remains a threat to the system, the system will not fully heal. For example, a viable market for the securitization of asset-backed loans is highly unlikely to reappear until mark-to-market accounting is dead and buried. Why would anyone buy asset-backed securities when there is the potential (readily witnessed over the past few years) for market-driven declines in value to undermine the ability of the financial system to hold them even if cash flows are not impeded?

If you don’t believe this, read the following exchange from last week (February 24th) between Fed Chairman Ben Bernanke and Congressman Kanjorski (D-PA).

Rep. Kanjorski: I’m particularly interested in the commercial real estate problem. Could you give us your assessment of that problem and if there’s any action we in the Congress should take.

Chairman Bernanke: Congressman, it remains probably the biggest credit issue that we still have. Yesterday, Chairman Baird talked about the increase in the number of problem banks. A great number of those banks are in trouble because of their commercial real estate positions. The Fed has done a couple of things here. We have issued guidance on commercial real estate, which gives a number of ways of helping, for example instructing banks to try to restructure troubled commercial real estate loans, and making the point that commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value. We’ve also, as you know, had this TALF program which has been trying to restart the CMBS – commercial mortgage-backed securities – market with limited success in quantities. But we have brought down the spreads and the financing situation is a bit better. So we are seeing a few rays of light in this area, but it does remain a very difficult category of credit, particularly for the small and medium sized banks in our country. [Our emphasis added.]

While Mr. Bernanke did not directly link accounting rules with his attempt to “restart” the CMBS market, it is clear that if mark-to-market accounting remains alive, this market will not be resurrected easily. No matter how much money the Federal Reserve throws at the market for securitized assets, the private sector will remain skittish if there is the potential for an accounting rule to wreck the market again.

This is very important for the Fed’s exit strategy and for the growth of the loan market in the years ahead. Without securitization, bank lending will continue to drag and the Fed will be worried about its withdrawal of support for the system. The US needs a viable securitization marketplace and mark-to-market accounting remains a stumbling block.

Mark-to-market accounting needs to die. It should be stabbed in the heart with a cedar stake, shot through the temple with a silver bullet and then buried under six feet of garlic powder. Like the evil killer in a horror flick, we need to make sure it never gets up off the floor ever again. While we do not agree with everything Ben Bernanke is doing these days, his comments, which finger the impact of accounting rules and conventions on the economy, are right on the money.

Hopefully, the SEC, Treasury, the FDIC, Congress, and FASB were listening.

By Brian Wesbury and Robert Stein

The Institutional Risk Analyst


Reblog this post [with Zemanta]

13 Comments

Filed under International Econnomic Politics, National Economic Politics