Amherst's Dobson: Bank stakes in bonds not enough

Sean Dobson, Chief Executive Officer and Chairman of the Board of Amherst Securities, speaks at the Reuters Investment Outlook Summit in New York, June 15, 2009.

NEW YORK (Reuters) - An expected U.S. plan to prevent future financial crises by forcing banks to retain an interest in asset securitizations may only offer false security to investors, Sean Dobson, chief investment officer at Amherst Holdings, said on Monday.

Requiring banks to have a stake, or "skin-in-the-game," in asset-backed securities is a key theme of U.S. President Barack Obama's plan to overhaul financial regulations. It goes to the heart of securitization, or the packaging and selling of loans as bonds, which critics say pushed too much risk onto investors and eroded lending standards to irresponsible levels.

Dobson, speaking at the Reuters Investment Outlook Summit in New York, said underwriting banks have taken interests in many asset-backed securities, but that failed to stop loose underwriting standards that led to the worst financial crisis since the 1930s.

Dobson is leading Austin, Texas-based Amherst's brisk expansion into the turbulent mortgage securities market, as larger brokerages and banks suffer under the weight of bad investments.

With collateralized debt obligations (CDOs), managers routinely kept the riskiest part of the deal, but still were "obliterated," he said.

The Obama administration will propose requiring lenders to retain 5 percent of the risk they securitize, a Treasury spokesman said.

"Unfortunately, this (proposal) can be seen as a false sense of security," if taken alone, he said.

The plan could work, however, if it more closely aligned banker and investor interests than in the past, he said. For instance, a bank may have a 5 percent share in a security that lasts for a short period, causing a conflict with investors holding the asset to maturity, he said.

A rule "would have to be very well constructed to prevent arbitraging the intent away," Dobson said. "You can live to the letter and say 'we retained a piece,' but it's unlikely that piece will have a prorated interest with the investor."

President Obama and U.S. Treasury Secretary Timothy Geithner will speak about the financial regulations overhaul on Wednesday, a White House official said.

One way to better solve the problem is to focus on increased disclosures of the underlying assets, such as home mortgages, Dobson said. Many of the home loans going bad probably would not exist if investors were privy to the loan-level details now available, he said.

However it's done, the revival of securitizations is necessary to open up credit, whose shortage has prevented a rebound of the U.S. economy, he said.

Securitizations were "all done a little too haphazardly," he said. "But the basic fundamental concept of taking a known set of risks, bifurcating them across a set of investors who are appropriately incentivized and educated to manage them makes sense."

(Reporting by Al Yoon; editing by Jeffrey Benkoe)