Here at SpecMat we’re interested in studying the peculiar materiality of structured finance, or securitization, which is the division of a generic or synthetic asset that always changes the asset in kind. We’ve also observed (Of Synthetic Finance ch.3) that it’s a technology, if used nomadically, for the abolition of private property (albeit not quite in the way the leather-cap communists meant). That’s why we were interested to see in yesterday’s WSJ three articles illustrating the veritable resurgence of structured finance.
It is true that we’re usually most interested in the many deep ontological features of finance, which constantly just sort of leap-out at the philosopher who sets out to rigorously study the technical elements of finance. And this is because, in part, the wagers of speculative materialism require us to think the monstrous power of the synthetic -and we can only do this by first grasping our images of objects by thought, as images, and then setting out to reimagine, refashion, or otherwise engineering their alternative, radical use. But its also true that there are days upon days when we read nothing in the news but what Heidegger called “chatter” (e.g. the Dow rose 22.19 points one day, then fell 22.18 the next, the VIX is at 12, then 13, etc. etc.), and therefore there will be times where we wish to alert our readers to interesting news in finance. For after all, are we not also trying to think the slow and incremental change by degrees that eventually if suddenly produces a change in kind?
First, Timaraos and Zibel report in “Easing of Mortgage Curb Weighed” that US securitization originators’ previous 5% risk-retention requirement is considered being lifted by US regulators, insofar as fear and evidence suggests that it is crimping the housing recovery; notably, both consumer advocate groups and industry practitioners are on the same side on this, of wanting the requirement to be lifted because its bad for both sellers (i.e. bad for mortgage lenders and securitization originators) and results in higher mortgage interest rates (which is bad for borrowers/buyers). This article nicely illustrates once more how regulation, which attempts to curb bad actor behavior in order to preempt its obvious and undeniable detrimental effects on the market, tends to have obvious and undeniable detrimental effects on the market. The point: regulation is bad for the market.
Secondly, Yoon and Timiraos tell us in “Freddie Shifts Housing Risk” that Freddie Mac just issued $500 million in derivatives tied to the mortgages they guarantee. The notes are called “Structured Agency Credit Risk”, which means they are synthetic notes whose notional value is tied to the values of billions of dollars ($20 billion, according to the report) of residential mortgage loans. The Journal always likes to quote people from the industry, as examples of Lacan’s subjects-supposed-to-know: to this effect, apparently Steve Abrahams, a mortgage analyst for Deutsche Bank, said of the deal, “Its the beginning of an experiment [for Fannie and Freddie]’, and that the transactions could mark ‘if not an end to their existence, then a serious change to their role.’ But this statement, as well as the title to this piece, as well as the officially-asserted reason for issuing these securities, is suspicious to a SpecMater: given that synthetic assets replicate a new risk and cash flow which did not exist before, how does synthetic securitization of residential mortgages securities move towards “shifting” the housing risk away from Fannie and Freddie, who together, lets face it, keep the secondary mortgage market afloat; the more accurate term here is probably “multiplying” risk ….We can’t help but think that something more is going on here than this?! (and of course, there is also the matter that if ‘everyone’ held the notes whose values corresponded to the values of ‘everyone’s’ mortgages, then ‘everyone’ would be materially invested in everyone else’s solvency -but now we’re talking about socialism…). The point: regulation is ambivalent for the market.
But thirdly, and clearly the most interesting of these three is Bisserbe’s report, “French Banks Get their Wings Back”. French Banks, who have long been involved in the aircraft finance market, but have slowly been losing market share of this industry, are now regaining that lost market share by electing to securitize their loans to airlines. The reason why is interesting. European regulators have been increasingly forcing their banks to match long-term funding with long-term debt, which squeezes their long practiced carry trade (viz. arbitrage) of borrowing a nickel for a penny every day after day and lending that same nickel they just borrowed to someone else (like an airline) for three pennies for two days. The yield curve, in other words, has arbitrage built into its time-horizon; and French banks, like all banks, have long made good money that way. The problem is, today, what happens in money markets never stays in money markets -as we learned in 2008, when suddenly a day arrives where no one will lend the bank that penny anymore; and even if this happens for just a day, the debt stops circulating, and given that the circulation of debt is finance capitalism, which either is in motion or is nothing at all, so too it stops. Regulators get this, and because these days they’re on perpetual market suicide-watch, they have eliminated, or at least sought to greatly curb this short term, money market method of funding.
But as this article illustrates: What happens when regulators regulate? The market adapts, new technologies are born, and/or in this case it leads to the resurgence of securitization. Its really fucking brilliant. Do you want to see some financial innovation, are you looking for a repetition that produces a new difference, just regulate, and voila! The point: regulation is good for the market.
However, if you’re new to drinking you don’t start out with Oban, but rather a small glass of chilled Brut Rosé. For this reason, if you’re new to securitization, you don’t want to read a technical manual on it (even though you could also read ch.2 of Deleuze’s Bergsonism at the same time and immediately sit down to write a book on the qualitative multiplicities of structured financial assets), or even rely on Journal articles on it. So maybe check out Vinod Kothari’s book on securitization, which is big and expensive, but luckily we have some chapters scanned in, and would gladly send it out to those who ask.