Imagine throwing a party for your best customers and none of them show up. What would you think about your future?
“Well, about a week ago at a Miami Beach asset-backed securities conference, Wall Street professionals invited their best institutional bond customers to a cool South Beach party and almost no one showed up.
The few customers who did attend were mostly vulture debt investors bargain shopping among the thousands of out-of-favor existing asset backed securities created during the boom years.
It only took me a few minutes to find out what happened to Wall Street’s customers and why they didn’t show up.
“Of course no traditional bond buyers are here,” one vulture investor told me. “I buy bonds that were rated AAA a few years ago for 30 cents on the dollar. The insurance companies and pension funds − they took it in the shorts. Who wants to be the dumb money, buy a new issue and watch it drop to nothing? No one’s gonna bet their job on Wall Street ever again. No one trusts them.”
Unfortunately, while it’s tough to shed tears for Wall Street traders and bankers, the structured finance investor boycott has broad negative implications for everyone else.Until the securitization market recovers it will be hard for many consumers to get a mortgage without government help. Jumbo mortgages that don’t qualify for Freddie, Fannie or FHA programs will remain elusive and expensive.
Many small businesses are having a tough time borrowing money for working capital or expansion because of the structured finance shutdown. It was asset-backed securities that created the liquidity for many small business loans prior to the credit crisis.
Like a junkie craving a fix, the commercial real estate industry needs the CMBS market to function. In a sign of bad things to come, just two weeks ago Credit Swiss announced layoffs in its commercial real estate group. The bank cited a lack of investor interest in buying new commercial mortgage backed securities as the reason for firing its department.
The real victims, however, were business and real estate owners who were depending upon Credit Swiss to fund their loans. These orphaned borrowers will discover that it’s tough to
find a new reliable lender.
Free markets advocates loudly chant the mantra of self-regulation and economic self-healing. But, instead of a getting better, the asset-backed securities new issue market is DOA with few signs of resuscitating itself.
On the other hand, Dodd-Frank legislation hasn’t worked either. If Dodd-Frank was actually fixing Wall Street’s problems, the asset-backed securities markets would be restarting. The best that can be said for Dodd– Frank is that it hasn’t made things much worse…so far.
The asset-backed securities market shut down illustrates that neither the free markets nor Dodd-Frank regulations are working. America needs a third way and soon. Trust, integrity and transparency aren’t complicated but seem hard to achieve for the securities and banking industry.
The solutions to Wall Street’s integrity problems
won’t come from Washington and they won’t be easy.If industry executives want to know how to fix themselves they should study the Wall Street’s economic history from 1920 through 1965. In the 1920s traders ruled the Street and traded their way into a banking induced housing collapse, a stock market crash and the Great Depression.
By 1931 customers had had enough of Wall Street
and began a multi-decade boycott of the industry. Private finance took the place of securities transaction and it wasn’t until the mid-1960’s that individual and institutional investors returned in mass to the securities markets.
The most successful firms to re-emerge from irrelevance
Goldman Sachs and Merrill Lynch (now a part of Bank of America), built their franchises based upon long term relationships, transparency and trust. Both firms had a customer first attitude and neither firm bragged about how they made money trading against their customers.
Goldman Sachs invented stock and bond research. If they had a good investment idea rather than keeping it for their own, they shared it with their customers and were rewarded with trading volume, assets under management and underwriting assignments.
For the asset-backed securities industry to restart, investment bankers need to re-learn the lessons of Sidney Weinberg and Charles Merrill and replace their focus on executing trades with a myopic focus on doing a good job financing businesses, consumers and families. They need to worry about how they can improve investor returns and always share their best ideas with customers first rather than use these ideas to enhance their proprietary trading profits.
Wall Street is loosing its relevance and becoming a dinosaur. Its business simply cannot exist without customers. Unless itfundamentally reforms, and quickly, an entire generation of bankers and finance professionals will find that they are no longer relevant.