As far as headlines that make me cringe go, two doozies came over the wires this afternoon. First there was this one from Bloomberg: "JPMorgan Poised to Lead CLO Comeback After Record Loan Rally." And then this from Reuters: "U.S. bank regulators water down securitization plan."
Yes, banks are so emboldened by 1) the resurgence of the market and 2) the lack of real regulatory reform that they are back pushing collateralized loan obligations, which Bloomberg noted "contributed to $1.7 trillion of writedowns and credit losses worldwide."
It's probably premature to think that the CLO market is going to start booming right away. Investors are understandably skittish about the sliced and diced debt securities for the aforementioned reasons. And with the economic recovery still fragile at best, getting into an investment that was almost completely illiquid only a year ago doesn't seem like the best idea.
But just hearing the sales pitch makes me wonder (again) exactly what's changed when it comes to banks' philosophies on risk taking -- or at least their propensity for pushing risk taking on investors.
"Market conditions have improved dramatically over the course of this year, which we see carrying on into 2010," Philippe Roger, J.P. Morgan Chase's global head of structured credit trading, told Bloomberg. "We are actively discussing the market environment with our clients, and think that they are going to be increasingly attracted both to the leveraged-loan asset class and securitization technology and applications related to the high-yield space."
Which brings us to the Federal Deposit Insurance Corp.'s debate over securitization. The regulator's board agreed to an interim proposed rule that "may change significantly" from an original proposal backed Chairman Sheila Bair, which contained restrictions on issuers of the securities that caused division on the board, Reuters reported. The interim proposal was watered down to reflect that.
The debate over the restrictions is obviously highly nuanced. But it also seems rather clear that if banks are indeed trying to go back to business as usual with products like CLOs they aren't all that concerned about the proposals.
Comptroller of the Currency John Dugan is arguing that the proposed changes to the securitization rulebook could have unintended consequences, such as increased costs for consumers. That's a noble reason, but maybe not enough to stonewall real reform.
After all, consumers would likely be hurt more by flimsy markets that can lose their liquidity overnight, push an economy into recession and unemployment into double digits.