The Wall Street Journal-20080204-breakingviews-com - Financial Insight- Debt Industry Looks Ahead- The Future Isn-t All Gloom As Securitization Pros Head Into Las Vegas Gathering

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breakingviews.com / Financial Insight: Debt Industry Looks Ahead; The Future Isn't All Gloom As Securitization Pros Head Into Las Vegas Gathering

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The world of securitization -- the repackaging of pools of debt into new securities -- was on a winning streak until the middle of last year. But thanks to the now-notorious excesses of U.S. subprime mortgage lending, the punters have returned to reality with a bump and a hangover. So it's fitting that Las Vegas is the venue for the American Securitization Forum's gathering this week.

As the industry's amassed ranks consider the future, there's plenty to be gloomy about. Home-loan defaults are still rising, and the pain seems to be spreading to other consumer-dependent areas such as debt tied to cars and credit cards. The once-abundant flow of some lucrative products, notably collateralized debt obligations, has all but dried up.

Yet the industry isn't at death's door.

First, the bad news. Investors are shunning parts of the market because key players they relied on look compromised. The credit-rating firms are rightly in the doghouse for their poor calls on subprime- mortgage-backed bonds and CDOs during the boom, and for their constant tinkering with rating criteria since. And bond insurers such as MBIA are racking up billions of dollars of write-downs.

The CDO market is moribund, and the Securities Industry and Financial Markets Association reckons the issuance of home-loan-backed securities supported by anything but the safest mortgages will decline by 50% or more this year, compared with last year, taking a big bite out of the industry's revenue.

Moreover, the banks that created many of these products have had their fingers burnt. Combined, their write-downs to date exceed $130 billion, and they could lose another $60 billion on nontraditional home loans and commercial real estate, according to Goldman Sachs.

It's not, however, all bad. There is more to the securitization business than subprime mortgages. It's true that other asset types used to back bonds -- traditional home loans, credit-card debt, car loans and so on -- could also face tougher times if the U.S. economic outlook continues weakening. But the impact should be relatively moderate.

For one thing, these markets have real history. One of the biggest problems with subprime mortgages was the lack of any meaningful historical data to underpin ratings. Most other asset-backed markets have track records of 20 years or more.

They have also seen very few downgrades, let alone losses. Just 2% of all deals sold before 1995 have been downgraded, according to Deutsche Bank. Deals involving subprime mortgages and CDOs account for 99% of all asset-backed rating downgrades since 2005.

There's also a big difference between mortgages and other consumer loans. Home prices can go up, but cars lose value immediately, and credit-card loans are not supported by any assets. At least ratings for these asset classes are not based on the assumption that the value of the underlying assets will rise, though investors should still be cautious about lending standards.

There are other distinctions, too. Credit-card securitizations, for instance, are a long-established way for usually diversified firms to finance lending businesses. They have more skin in the game than one- trick subprime lenders that took little interest in credit standards as long as they could collect fees.

And investors wanting to double-check rating firms' work on prime car loans, say, can get their hands on loan-level data that either wasn't available or wasn't trustworthy for subprime mortgages. CDOs, being a mixed bags of different assets, were particularly impenetrable. So, for those deals, investors relied too heavily on flawed ratings.

All in all, the hordes will have plenty to talk about in Vegas. There's room for action, too: Investors still need better access to information, one thing the American Securitization Forum is working on. But after a horrible few months, there's hope for better times ahead. So while the latest Golden Age of securitization may be over, the talk needn't only be about fear and loathing and lost wages.

-- Richard Beales and Antony Currie

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This column is by breakingviews.com, an online financial commentary site.