By John Poirier and Kevin Drawbaugh
WASHINGTON (Reuters) - After a spree with subprime mortgages, the hung-over securitized debt market will need time and a firm hand to sober up, said a range of U.S. banking regulators and lawmakers this week.
At the Reuters Regulation Summit, officials urged more simplicity, transparency and accountability all along the securitization chain, which has transformed ordinary loans into complex investments.
Credit rating agencies must tighten their analysis and grading of the collateralized debt obligations (CDOs) and other instruments created by securitizers and sold to institutional investors, who must also do a better job inspecting the goods.
"There'll just be a period where things are going to have to settle down," said Comptroller of the Currency John Dugan.
"People are going to have to get comfortable starting with more basic kinds of products and then we'll see how much that develops over time," said Dugan, whose agency supervises major U.S. banks such as Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and Citibank (C.N: Quote, Profile, Research, Stock Buzz).
Securitization has steadily grown on Wall Street, giving once humdrum mortgages, auto loans, student loans and credit card balances new flair and flexibility.
Banking is no longer simply about lending money, booking the debts as assets and waiting for repayment. With securitization, loans could be bought, sold, sliced, diced and bundled into special vehicles for sale to investors.
The technique dispersed risk, opened new capital pools to borrowers and -- as is now becoming clear -- diluted accountability, undermined lending standards and introduced baffling complexity, said financial officials.
It came to a head in the mortgage market, where securitization was fueled by a historic boom in home prices, low interest rates and aggressive extension of credit to people with a poor record of handling debt.
These trends fed off each other for years. Finally, when the bubble burst, many of the models underlying securitized mortgages failed and the system's flaws were laid bare.
"The market seized up and nobody knew where the assets were," said Federal Deposit Insurance Corp Chairman Sheila Bair at the summit, adding that she supports securitization and that it has had some very positive economic benefits.
But, she said, "To get investor confidence back... there's got to be a lot greater transparency."
With the secondary mortgage troubles spilling over to other markets, lawmakers are calling for reforms.
"First, regulate the mortgage brokers," said New York Democratic Sen. Charles Schumer at the summit.
Some lawmakers are also talking about exposing financiers along the securitization chain to more legal liability if they fail to weed out improper mortgages from proper ones. Continued...
© Thomson Reuters 2009. All rights reserved.
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