In the News: Recent Developments

Nov 5, 2007

Levitt Says Asset-Backed Bonds Need Better Disclosure (Update1)

By Mark Pittman Published in Bloomberg News / BusinessWire

Wall Street needs to make trading in asset-backed securities more transparent before rules to do so are forced upon it, former Securities and Exchange Commission Chairman Arthur Levitt said. Levitt suggested that asset-backed trading prices could be made publicly available through the Trade Reporting and Compliance Engine, or Trace, operated by the Financial Regulatory Authority.

“For the securitization market to continue, we cannot ignore the need to be transparent at all levels,” Levitt said at the ABS East conference in Orlando. “If we don’t, as an industry, work with regulators to come up with a better plan for transparency, one will be imposed upon us.”

Prices disclosure has been good for the corporate bond market and would work as well for asset-backed securities, Levitt said. Since July 2002, traders have been required to report sales to a computer system that disseminates prices to anyone with Internet access. Levitt spoke via telephone yesterday at a panel organized by Joseph Fichera, chief executive officer of Saber Partners LLC.

Levitt’s remarks came after Citigroup Inc. wrote down about $11 billion in structured financial products such as collateralized debt obligations and Merrill Lynch & Co. wrote down $8 billion in the securities. Both firms forced out their chief executives. The housing crisis that sparked the losses in CDOs has prompted the Federal Reserve to cut interest rates twice in two months to head off a recession in the U.S.

Liquidity Preserved

Mortgage debt and bonds backed by trade receivables, as well as car and credit card payments are not currently subject to Trace-style reporting rules. Corporate bond trades average about 20,000 a day and have a value of between $17 billion and $20 billion, said Finra executive vice president Steve Joachim, also a panelist. Predictions that corporate bond trading would wither after Trace have proven not to be true, he said. We’ve seen no evidence of damage to liquidity,” said Joachim.

Dealers still are frequently unwilling to commit capital for trades because of Trace disclosures, said SIFMA Senior Managing Director Michael Decker, another panelist. SIFMA, a trade group that represents bond underwriters and dealers, says Trace cut trading of corporate debt because dealers aren’t being compensated. Trace posts prices almost instantly after trades occur.

Oriental Bazaar

Levitt, who’s a member of the board of directors of Bloomberg LP, parent of Bloomberg News, said the corporate bond market used to work like an “Oriental bazaar.” He left the SEC in 2001.

Kumar Venkataraman, who teaches portfolio management at the Edwin L. Cox School of Business at Southern Methodist University in Dallas and another panelist, estimated that corporate bond traders lost $1 billion in fees from mid-2002 to mid-2003, or about $2,000 a trade, according to a study published earlier this year in the Journal of Financial Economics.

“The ABS market is large and it’s the fastest-growing one in the U.S.,” Kenkataraman said. “If investor confidence has been shaken in this market, then it has implications for the overall economy. For that point alone, the regulators have a right to look at this issue.”

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