What happens in ABS shouldn’t stay in ABS

At last week’s well-attended ABS Vegas conference, the buoyant and constructive mood was punctuated by comments around transparency and regulation that will have been incredibly frustrating for some observers.

As tuxedo-wearing veterans of the asset class sipped Dom Perignon and faux-complained about mortgage regulations gone by, delegates were reminded both of how regulation has tamed/shackled the industry (depending on who you ask) and how securitization’s popularity has helped it adapt to the post-crisis supervisory onslaught.

But while regulation may have got to the point where it is easy to lampoon, there is still a long way to go before securitization is out of the behavioural danger zone. Transparency is one of the most effective ways of guarding against the kind of practices that defined the crisis — ratings shopping, deterioration in underwriting standards, originate to distribute — but some market participants are still trotting out increasingly lame excuses.

At a panel on transparency, Steven Day, GE Capital’s head of investor development, came up with a good one. “At some point too much detailed information such as loan level data can actually be counter-effective as it raises questions that we may not be able to adequately clarify in a public manner,” he said.

Given ongoing investigations into consumer lending products that end up financed through the ABS market, like auto loans and mortgages, issuers’ adversity to public relations risk is understandable, but in the long run, being more open about their work can only help.

It’s not enough to claim, as Day did, that doing so would take away lenders’ competitive edge. As this publication has argued before, good underwriters should have nothing to fear from greater transparency. For the same reason, they should have no reason to fear risk retention — as Barney Frank argued in his keynote address.

Asset-backed securities and structured credit products are complex creatures. But in the so-called information age, the informational asymmetries that persist in this market are astounding. A mature market should welcome the concept of transparency — and nowadays, the technology exists to make that concept a reality.

Peer-to-peer lending platforms have harnessed the power of big data to aid their underwriting and, just as they benefit from transparency, are passing this on to their investors. Reg AB II enforces loan-level data requirements on issuers of public ABS transactions, and market participants hope those standards will gradually make their way into the private market.

But many issuers are still seem reluctant, and their rhetoric doesn’t help. Everyone else is calling for better disclosure, but issuers are still being dragged, rather than leading the way. In the quarter-by-quarter world of financial markets, first mover disadvantage could be argued as a reason for this reluctance — but someone has to set a standard.

It’s not enough to blithely complain that terms like ‘shadow banking’ make ABS seem like “we are all Darth Vader and are the evil in the world”, as Stephen Ceurvorst — of the aptly-named Lord Capital — did on the final day of the Vegas conference. Even as the dark days of the subprime meltdown succumb to the market’s collective amnesia, it’s not too much to ask issuers to prove they’re not hiding something.