Long Live Securitization

Yves Smith reports that "sercuritization is dead" (link). Boy, I hope not. Or more precisely: if Blaming "securitization" for the recent mess is like blaming "options" for the various meltdowns in the 90s--or like blaming airplanes for air crashes. Yes, it happened on their watch, but securitizations don't kill people, people k-- but you've heard that one before.

I can see at least two aspects of the current mess that came out of the securitization model but neither one, I think, is part of the essence. One: loan brokers with money-in-front compensation. Not only did the brokers have no incentive to police the loan apps, they had a powerful incentive not to police them, so they could take the money and run. Same problem caused the looniest of the deals in the M&A boom of the late 80s, early 90s. The Wichita bureau says it also explains a good deal of the farm credit meltdown in the midwest in the 80s. And neither of these was particularly linked to securitization.

The other was the "who owns the problem?" problem. Or rather, the problem that nobody owns the problem. The important difference in the old days was not so much the way the loan was made, but what happened to it afterwards. The loan officer signed off on the loan. If it went sour he still had to face his colleagues and his boss. Sometimes he had to clean up his own mess, which was probably not such a hot idea because he had too much emotional investment. Sometimes you sent it off to "special procedures" tucked away on the 12th floor of the Acme building in a seedy neighborhood on the other side of town. But either way, someone had the responsibility of picking up the pieces.

But this model has been evolving away for a long while. Oldtimers will remember Penn Square, the canary in the mineshaft of 1980 bank failures--the one that almost brought down Chicago's Continental Bank (here's a refresher). Best way I could tell at the time, it seemed like the managers at Continental had taken some 28-year-old MBA into the vault with a shovel and instructed her to empty it out by closing time (maybe I embroider a bit, but that's a side issue). One assumes that this particular loan officer had long since been bonused and promoted before anything particularly fecal ever came close to the fan. If I am anywhere near right, then this is a problem, but not a problem of securitization; it is a problem involving failure of management and internal control.

By the way while I am at it, will everyone please stop talking about the mortgage meltdown as a "black swan event?" A "black swan" is not just something big and unpleasant; it is something unexpected in the sense of being unquantifiable (link). Anybody who paid the least bit of attention to mortgage markets over the last few years saw this one coming a long time ago.