Readers: It's about time. Now given that Bair is a female and the boyz in the Wall Street hood are still working on rebooting their casino, given the hashing that was done to Brooksley Born back when these problems first came to notice, and that the FDIC is close to bancruptcy itself in cleaning up the boyz messes, even though Helicopter Ben has not been approved for a return engagement, and... and I'll give her about a one in ten of this happening in the next year. But she is doing what needs to be done, and that is good. Admin

http://www.bloomberg.com/apps/news?pid=20601103&sid=a6vpQ_GS2J50

By Dawn Kopecki

Dec. 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the market for bonds backed by consumer debt won’t be weaned from government assistance until banks embrace stiffer guidelines for issuing the securities.

“Nobody has any confidence in the securities,” Bair said in an interview yesterday at Bloomberg’s Washington office, calling for more effort by the industry to stabilize the market. “If they just want to keep things the way they were and resist change, it doesn’t work any more.”

The market for bonds backed by car loans and credit-card payments had been relying on a Federal Reserve funding program for the bulk of investor interest since March after the main measure of risk widened to records in 2008. The FDIC plans to vote Dec. 15 on new voluntary restrictions for such bonds as a way to reassure private investors that the market is safe.

“It’s all about whether there’s confidence in the assets that back the securitization,” Bair said. “So it’s heavy on disclosure, it’s heavy on underwriting quality, it’s heavy on incentives, skin in the game requirements.”

Federally insured banks and thrifts would need to retain an ownership interest in loans they package into securities -- potentially 5 percent to 10 percent. Banks would also disclose more data about mortgages and other debt backing those bonds and tighten underwriting. The proposal would give companies more favorable regulatory treatment for following the new guidelines.

Getting Focused

“Given all the problems we’ve had in the securitization market, it would be irresponsible for us not to impose any conditions on this favorable treatment,” she said. “So we’re going to take a stab at it and that will probably be controversial too. But I think we need to get people focused, we need to start making some decisions on what the securitization market will look like because not much is happening right now.”

Requiring lenders to retain risk in the loans they package into bonds will lead to higher borrowing costs for consumers and will limit access to credit, the Mortgage Bankers Association, the industry’s largest trade group, said in a Dec. 3 letter to House of Representatives leaders opposing proposed legislation.

“Available funds for home financing would be reduced by countless billions of dollars by lenders needing to meet higher reserve requirements,” the Washington-based association said.

Bair said her proposal, which would be available for public comment for 45 days, would take effect as early as March 31. Her plan only applies to securitized loans and wouldn’t directly affect non-bank lenders, including the broker-dealer arms of federally insured banks like JPMorgan Securities.

House Legislation

Asset-backed bonds are derived from receivables such as mortgage interest, auto-loan payments, credit card payments and royalties. They are typically sliced into classes, or tranches, with varying rates and risks and sold off to private investors.

The House is scheduled to vote on legislation next week that would require companies that sell or package consumer loans into bonds to retain an ownership stake of at least 5 percent in the underlying assets as part of a broader package of laws aimed at curbing excessive risk taking on Wall Street.

Senate leaders have said they plan to take up a similar measure early next year.

Banks and financial companies worldwide have reported more than $1.7 trillion in credit losses and writedowns since the financial crisis began to unfold in early 2007, mainly because of bad bets on risky investments including subprime mortgages.

The asset-backed securities market seized up in the wake of the collapse of Lehman Brothers Holdings Inc. in September 2008. The Fed’s Term Asset-Backed Securities Loan Facility, or TALF, has resuscitated that market by lending investors the money to purchase top-rated securities.

Dramatic Effect

Excluding bonds with government backing, securitization volumes worldwide total about $650 billion this year, down from $2.57 trillion in 2006, according to newsletter Asset-Backed Alert. Sales of securities backed by auto loans and credit cards are at $104 billion, compared with $107 billion last year and $171 billion in 2007, according to data complied by Bloomberg.

While the FDIC’s proposal would be voluntary, “it will have a significant financial affect on the securitization,” said Michael Krimminger, Bair’s special adviser for policy.

Securities that adhere to the FDIC’s new guidelines would receive higher credit ratings and better pricing in the markets because they wouldn’t be seized along with other assets if a bank is placed into receivership, Krimminger said.

Securitized assets, which are generally held off-balance sheet, fall outside the FDIC’s reach when a bank fails. That changes Jan. 1 when the Financial Accounting Standards Board implements rules that require banks to move off-balance sheet assets held in securitization trusts back on to their books.

Safe Harbor

The FDIC granted a “safe harbor” for assets securitized through March 31, 2010, from the agency’s reach. Asset-backed securities that don’t meet the FDIC’s new rules will be subject to seizure after that date.

“I think the credit rating agencies would have a difficult time assigning a AAA rating to an asset that could be seized in bankruptcy by” the FDIC, said Scott Buchta, the head of investment strategy at Guggenheim Securities LLC in Chicago. “I don’t think we’ll be able to securitize assets that don’t have the exemption.”

The safe harbor is important because abuses in mortgage- backed securitization have cost the FDIC “a lot of money,” Krimminger said.

Closed Banks

The FDIC has closed 149 banks in the past two years and its insurance fund now stands at negative $8.2 billion, the first deficit since 1992. The fund is used to reimburse bank customers on deposits of up to $250,000 when a bank fails.

The FDIC had $38.3 billion in assets from failed banks as of Sept. 30, $22.3 billion of which were loans and $9 billion in securities, said David Barr, a spokesman at the agency.

“Part of the problem with the securitization industry is it’s so diverse: You’ve got the servicers and the originators and the investment banks and the investors and they all can be at cross purposes,” Bair said.

“If they want to bring the market back, they’re going to have to get the investors to buy,” Bair said, adding, “I don’t want a securitization market driven by capital arbitrage.”

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com.
Last Updated: December 4, 2009 00:00 EST