The New Risk: Securitization
Suzanne McGee writes at Portfolio.com that the financial crisis has changed the way people think about risk. At the end of every three-month period, data providers crunch through a mountain of information about stock and bond deals, M&A activity, and all kinds of other financing to produce the much-scrutinized “league tables.” And the final weeks of December were no exception, as Jody Drulard and his team at Dealogic LLC scrambled to put together a summary of Wall Street’s dealmaking for the watershed year of 2009.
But instead of looking at what Wall Street firms had done in 2009 (notably, a big rebound in debt issuance that earned $18.2 billion in fees for investment banks and banks globally), Drulard found himself pondering what wasn’t showing up on the league tables he was compiling. Specifically, that missing $3 trillion or so of capital that Wall Street had raised every year for most of the first decade of the 21st century.
“Really, what’s happened is that about 25 percent of the capital markets fundraising activity has just evaporated,” says Drulard, managing director of Dealogic. “The securitization market had $2 trillion of capital raised every year for six years or so; another $1 trillion once raised in the loan market is gone as well. If that’s the ‘new normal,’ that’s got to be worrying for Wall Street.”
Folks like Reed Auerbach, head of the structured transactions group at the law firm Bingham McCutchen, are already feeling the impact. Back in 2006, at the peak of the market, partners and associates at McKee Nelson (the predecessor firm, of which Auerbach was co-CEO) were toiling away to put together three or four securitizations or more every working day. “It was like a machine,” Auerbach says. Last year? Bingham McCutchen, which merged with McKee Nelson last year, is still No. 1 in terms of the number of securitization deals it helped put together. But it worked on only 114 transactions in 2009, down from 1,100 or so in 2006.
To some extent, the ebullient bond market masked some of the pain for financial institutions last year, as companies raced to take advantage of relatively low rates and rapidly recovering investor interest to issue a record $2.78 trillion. Even junk-bond issuance soared to $175.6 billion, triple 2008 levels and within 10 percent of the 2006 issuance record. And Drulard figures that underwriting new debt and stock issues will continue to keep Wall Street’s bankers busy in 2010. “But securitization and lending have been very important products; for Wall Street to be healthy again, they need to come back.”
It isn’t just Wall Street that will suffer. Over the last decade or two, financial institutions have come to rely on the ability to securitize a chunk of the loans they make in order to manage their risk. And when banks were reluctant to lend, non-bank financial institutions did so, knowing that they could resell those loans to investors through Wall Street’s securitization machine. As is now all-too-well known, that machine got carried away in the years leading up to the 2008 credit crunch and the near collapse of the financial system.
Read more at: The New Risk: Securitization
Other related stories at ddifo.org: Dunkin’s Brouhaha
