For Securitization Industry, Back to Basics

The American Securitization Forum kicked off Monday at the Venetian Resort in Las Vegas, Nevada to a much more somber note than previous years. The conference, traditionally held at the casino and gambling capital of the nation (a bit of self-jest, although the failed gamble on the subprime mortgage market may have cast a note of irony on the joke), started off with preliminary discussions Sunday and will continue through mid-week. Sandra Thompson, director of the division of supervision and consumer protection within the Federal Deposit Insurance Corp., was one of the first to speak at this year’s conference, replacing Sheila Bair, whose understandably busy schedule prevented her from attending. Thompson added to an overall tone of reform when she urged the industry to return “back to the basics” of sound lending practices and credible securitization structures. “We must reform our credit markets to make them more sustainable,” she said. From “complex and very murky” ratings practices to lenders and originators with only a short-term view of profit all went together to cause the credit crisis now seen, she said. “Originators didn’t think they had any risk” when they first made bad loans and built securitizations from them, Thompson said. “Such an incentive system that rewards deal making…is and was a recipe for disaster. Rewards must be restructured to promote longterm results. Everyone needs some skin in the game.” Key industry players echoed her caution going forward as well as lessons that can be learned from looking back. Tom Marano, president and CEO of Residential Capital LLC, said the securitization industry was made to be too complex and the securities themselves became too complex to manage. He suggested a movement of reform to the industry as well as a list of rules of engagement that may help people within and without the industry understand the system and what can and cannot be done with securities. “You can treat a psychiatric patient with medication and skip the talk therapy. Well, we need both,” Marano said. Tricia Hazelwood, managing director of Credit Suisse, added that treating the psych patient with every bit of medicine available is likely to kill him. “The problem is a lot bigger than just an aggregate bank can handle,” she said, citing the “bad bank” that may be in the works and announced as early as Tuesday by Treasury Department secretary Tim Geithner. “We have to make the goals work,” Hazelwood said. “We have a multi-trillion dollar problem, so an $800 billion solution will not work.” HousingWire is reporting on-site from the ASF all week, and will continue to publish industry updates as they occur. Write to Diana Golobay at diana.golobay@housingwire.com.