Wednesday, 17 June 2009

5% is not much

The Obama administration is proposing that originators should retain a 5% stake in securitisations. This is not enough. 20% or 25% would achieve the desired alignment of interests. 5% gives 20:1 leverage. Yet another missed opportunity.

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6 Comments:

Blogger Dave said...

Can you explain why you need regulations on this? If I want to buy asset-backed securities, can't I decide which originators I trust and which I don't?

This seems to have nothing to do with systemic risk or "too big too fail". It is just principal-agency risk pure and simple. Why can't the market sort this one out?

12:33 am  
Blogger William Mitchell said...

This comment has been removed by the author.

5:29 pm  
Blogger William Mitchell said...

Dave, one reason the market can't sort it out is that complexity impedes transparency.

5:31 pm  
Blogger Dave said...

OK, but

"as MBS are currently prepared, if everyone who didn’t understand them didn’t buy, there would be no MBS industry" (from your link).

Why would a PROFESSIONAL ever buy anything that they didn't understand? I would certainly not want such a professional spending MY money.

Maybe there SHOULD be no MBS industry.

I'm all for improved transparency and accountability, but the sort of micro-regulation exemplified by the 5% rule seems to be about fighting the last war rather than preparing for the future.

12:19 am  
Blogger Dave said...

Actually, the transparency/complexity issue is somewhat tangential. What I really meant was this.

Originator A declares that he has 20% "skin in the game"; B declares he has 5%; C declares he has nothing. D doesn't make any declaration (or makes a declaration so complex that you can't work it out).

Who would you choose to buy from? Should the regulator choose for you?

12:27 am  
Blogger David Murphy said...

Philosophically I have a lot of respect for 'buyer beware'. But given that buyers don't beware as much as they should, some safeguards to stop unscrupulous sellers passing on bad risk do seem to make sense from a financial stability if not a moral hazard persepective. I'd love to live in a world where the consequences of bad risk assessment were born by the party that got it wrong alone, but sadly I don't...

11:01 pm  

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