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Sector will return to basics in 2008 Back  
Despite the credit and liquidity crisis impacting severely on the securitisation market in 2007, the general consensus of delegates and speakers at the 6th Finance Dublin Securitisation Conference was that the industry needs to return to basics to go forward from the crisis, but that the sector will recover some time in 2008. Governor of
the Central Bank, John Hurley, delivered the keynote address to delegates, calling for a reassessment of the securitised model of capital markets saying it would ‘help create a more robust securitisation model, thereby ensuring that the many important benefits of this model are preserved’.
While the securitisation industry is taking a battering as a result of the sub-prime crisis in the US, and the ensuing liquidity crisis caused by the banks withdrawing liquidity, the industry is hopeful that the industry will re-emerge in 2008 more robust than before the current crisis.

John Hurley, Governor of the Central Bank and Financial Services Authority of Ireland and member of the Board of Governors of the European Central Bank, opened the 6th Finance Dublin Securitisation Conference, delivering a keynote address on the Central Bank’s role in the credit crisis and discussing the implications of the crisis for Ireland.

In particular, the Governor pointed to the breakdown in the traditional link between the location of risk and capital in the system arising from the ‘originate and distribute’ model behind securitisation, which, he said, has ‘changed the incentives regarding the management, assessment and monitoring of credit risk’. ‘We need to look at the issues this raises’, he added.

It has essentially been the breakdown of the securitised ‘originate and distribute’ model, originating primarily in the ‘sub prime’ mortgage markets of the US, that has led in the past five months to the global contagion of trust in the credit and money markets.

Governor Hurley said that ‘market conditions are likely to persist at least into early 2008, and there is still some way to go before they are returned to normal market conditions.’ Adding, ‘the response of the Central Banks to this crisis has been unprecedented. The ECB have moved to meet the liquidity needs of the banks in order to restore and maintain calm.’

He took the view that the Bank’s actions were necessary. ‘Failure to respond to the interbank liquidity impact of the wider financial market turbulence would have added a serious additional dimension to the problem. Not to respond would have impacted on the entire banking system, most of which had little or no in structured credit markets,’ he said.

Looking forward, Hurley noted that the current crisis could possibly have an impact on growth in the eurozone, if condition were to persist.

He said, ‘The broad repricing of risk and tightening of financial conditions has tilted the balance of risks to euro area growth to the downside. In the event of a more significant slowdown in the US, the extent to which the global economic activity stays decoupled from US developments remains to be seen.’

Looking at the current situation in the credit markets, Michael Hampden-Turner, director of the credit products strategy group at Citi, gave a very detailed analysis of the current market outlook, and looked at the fundamentals of the situation.

‘CLO issuance is at depressed levels, but continuing, while it is very hard to see highly rated paper defaulting,’ said Hampden-Turner. Looking at the situation as a whole, Hampden-Turner said,’If we’re lucky, this turns out like 1998.’

Head of credit research at Legal & General, Georg Grodzki, spoke on the future of the credit markets. Rather ominously, he said, ‘We are all a little bit clueless as to the impact of the next stage of the drama, we have had a number of false dawns already. Any new issue is now greeted with suspicion, there is a fear that it will reprice the market up.’

Grodzki did say that there was opportunity out there, but it would take a brave investor to seize such an opportunity in the current climate.

‘There is plenty of value out there for those who have the guts to do so, however this is unlikely. January and February may be rocky, but things may pick up by the end of Q1. Looking beyond one year, there’s is better value on offer.’

Eugene Yeboah, head of structuring - structured credit at Schroders, said that investors need to look at the underlying assets in an investment not the investment vehicle itself. However, Yeboah also said that, given the current market conditions, there was ‘tremendous value in investment grade synthetic CDOs [collateralised debt obligation].’

Professor Moorad Choudhry, visiting professor, Department of Economics, London Metropolitan University, and visiting research fellow, ISMA Centre, University of Reading, conducted two seminars offering delegates an introduction to securitisation. Looking at the current crisis, Choudhry said that, ‘we have seen that when securitisation goes wrong, it can do so in spectacular fashion. The crisis has thrown the ‘magic of securitisation into perspective. We cannot create gold out of base metals.’

Also addressing the seminar was partner at Orrick, Herrington & Sutcliffe, Sharad Samy, he said that a form of extendable commercial paper could help to ease funding difficulties for conduits. These mechanisms allow conduits to extend the term of commercial paper, while paying a penalty rate of interest. ‘This way the vehicle doesn’t have to default, it could pay the penalty and wait for the market to reopen. It’s a nice idea,’ he said. However, Samy admitted that the advent of the specialised investment vehicle lite (SIV-lite) had ‘pushed the envelope a little bit.’ He was of the opinion that banks would now need to look at the market value of vehicles as a true test of their worth.

However, Dermot Hardy, head of treasury, Aareal Bank AG Dublin, said that in the current uncertainty, it is difficult to find a direction of causation, making the task of identifying the root cause of events very difficult. Hardy also said, ‘the European Central Bank and the Fed have given us an excellent response, by offering a discount rate and making liquidity available to halt any possible liquidity crisis.’ To see an end to the current uncertainty, Hardy claimed that we would have to wait to see the banks’ audited Q4 reports, to gauge the full exposure of financial institutions, and after that a return of liquidity would herald an end to this unprecedented crisis, he said.

Sean Hannigan, financial analyst, Standard & Poor’s said that he did expect delinquencies to increase in 2007, as a result of 23 per cent UK non-conforming mortgages coming up for refinancing, 30 per cent will be refinanced in Q1. He said that we ‘will begin to see the full effects of these actions in March, April and May 2008.’

Despite many conference delegates and speakers speaking hopefully about the coming months in the securitisation market, Neil Ryan, head of Asset Management, senior vice president, Wachovia Bank, was somewhat more pessimistic about the coming year.

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