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Australia's politicians decide its a good time to start our own mainstream mortgage securitisation market....we're always 20 years behind the US so why not follow again.....I guess the US is still very influencial and seen as the provider of good policy!
Editor's Note: Dan Denning is away today but in his place is Money Morning editor, Kris Sayce. If you don't get Money Morning you can sign up here, it's free.
From Kris Sayce, at the Old Hat Factory:
Every morning we scan through the Australian Financial Review for any news items of interest. We don't rely on it for te Daily Reckoning because what is written in today's newspaper is news from yesterday. Our aim is to bring you today's news today.
This morning we scanned it as usual. And as per usual our eyes glazed over on reaching the property section, expecting to be bored rigid by the tens of commercial property ads.
One news item did enough to unglazed the eyes. The headline was "House prices go to market." The gist of the story is that the bright sparks at the Australian Stock Exchange are looking to release a new listed product.
A quick side note on this. The ASX is under massive pressure to increase its revenues. There are two reasons for this. First, it has seen a drop in volume as brokers tell their clients to sit tight. Second, it is about to face stiff competition from two new exchanges that will take some of the institutional business away from the ASX.
With this in mind, the ASX needs to develop as many ways as it can for investors to trade on the ASX.
The product the ASX has in mind is a derivative based on the property market. You can see why it caught our attention. It got us thinking. Haven't we seen a couple of stories around about a few small problems with property and complex products in the US?
Don't get us wrong. Personally we have no problem with derivatives. We don't fall into the Warren Buffet camp of describing all derivatives as "Weapons of Wealth Destruction." We also don't fall into the camp that claim derivatives are far too complicated for retail investors. And that they are far too dangerous for retail investors.
In fact we would be tempted to argue the opposite. How often has a retail investor or even a group of retail investors 'blown up' a market using derivatives? Not often. It tends to be the pinstriped boffins on Wall Street, the City of London or Martin Place that inflict the most pain on markets. Anyone heard of Long Term Capital, Barings Bank or NAB's foreign exchange trading comeuppance? There wasn't a retail investor in sight.
The products will be promoted RP Data and Rismark International. According to its website, Rismark is a "global funds management business that has expertise in the execution of sophisticated real estate investment, research, securitization and active portfolio management strategies."
Any alarm bells yet? The company claims that its products can help with the so-called "housing affordability crisis" in the Australian property market. A market which it tells us is "valued around $3.2 trillion."
Trillion. That's another word we've heard a lot of recently. More worryingly, Rismark's Equity Finance Mortgage (EFM?) has "bi-partisan" political support.
Having just finished reading Liar's Poker by Michael Lewis, it seems remarkably similar to the birth of the securitized mortgage market in the US during the 1970's and 1980's. A "smart" Wall Street banker invents a new way to tap into a pot of illiquid cash tied up in housing. The product is marketed to Savings & Loans companies as a hedge on their investments in the housing market. These are then packaged, or securitized into investments and sold to investors.
That much of it is fine. However, the consequence is that once those mortgages have been hedged away the S&L can loan out the money again to someone else, and so the spiral continued over nearly thirty years until we see the mess currently happening in the US.
We can almost guarantee that the products will be initially promoted to hedge or protect an asset. It won't take long before the whizz kids move in and market these products to Australia's equivalent of S&L's (Credit Unions) and other non-bank lenders.
The only positive to this is that the ASX has a woeful record when it comes to non-standard products. So there is just as much chance that the whole idea could fall flat on its face.
.
.
.
I guess the last paragraph is our only hope.
| A Trillion Reasons to Worry The Daily Reckoning Australia London, England - Melbourne, Australia Thursday, 11 September 2008 |
|
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Editor's Note: Dan Denning is away today but in his place is Money Morning editor, Kris Sayce. If you don't get Money Morning you can sign up here, it's free.
From Kris Sayce, at the Old Hat Factory:
Every morning we scan through the Australian Financial Review for any news items of interest. We don't rely on it for te Daily Reckoning because what is written in today's newspaper is news from yesterday. Our aim is to bring you today's news today.
This morning we scanned it as usual. And as per usual our eyes glazed over on reaching the property section, expecting to be bored rigid by the tens of commercial property ads.
One news item did enough to unglazed the eyes. The headline was "House prices go to market." The gist of the story is that the bright sparks at the Australian Stock Exchange are looking to release a new listed product.
A quick side note on this. The ASX is under massive pressure to increase its revenues. There are two reasons for this. First, it has seen a drop in volume as brokers tell their clients to sit tight. Second, it is about to face stiff competition from two new exchanges that will take some of the institutional business away from the ASX.
With this in mind, the ASX needs to develop as many ways as it can for investors to trade on the ASX.
The product the ASX has in mind is a derivative based on the property market. You can see why it caught our attention. It got us thinking. Haven't we seen a couple of stories around about a few small problems with property and complex products in the US?
This Could Be a Real Housing Crisis
Don't get us wrong. Personally we have no problem with derivatives. We don't fall into the Warren Buffet camp of describing all derivatives as "Weapons of Wealth Destruction." We also don't fall into the camp that claim derivatives are far too complicated for retail investors. And that they are far too dangerous for retail investors.
In fact we would be tempted to argue the opposite. How often has a retail investor or even a group of retail investors 'blown up' a market using derivatives? Not often. It tends to be the pinstriped boffins on Wall Street, the City of London or Martin Place that inflict the most pain on markets. Anyone heard of Long Term Capital, Barings Bank or NAB's foreign exchange trading comeuppance? There wasn't a retail investor in sight.
The products will be promoted RP Data and Rismark International. According to its website, Rismark is a "global funds management business that has expertise in the execution of sophisticated real estate investment, research, securitization and active portfolio management strategies."
Any alarm bells yet? The company claims that its products can help with the so-called "housing affordability crisis" in the Australian property market. A market which it tells us is "valued around $3.2 trillion."
A Trillion Reasons to Worry
Trillion. That's another word we've heard a lot of recently. More worryingly, Rismark's Equity Finance Mortgage (EFM?) has "bi-partisan" political support.
Having just finished reading Liar's Poker by Michael Lewis, it seems remarkably similar to the birth of the securitized mortgage market in the US during the 1970's and 1980's. A "smart" Wall Street banker invents a new way to tap into a pot of illiquid cash tied up in housing. The product is marketed to Savings & Loans companies as a hedge on their investments in the housing market. These are then packaged, or securitized into investments and sold to investors.
That much of it is fine. However, the consequence is that once those mortgages have been hedged away the S&L can loan out the money again to someone else, and so the spiral continued over nearly thirty years until we see the mess currently happening in the US.
We can almost guarantee that the products will be initially promoted to hedge or protect an asset. It won't take long before the whizz kids move in and market these products to Australia's equivalent of S&L's (Credit Unions) and other non-bank lenders.
The only positive to this is that the ASX has a woeful record when it comes to non-standard products. So there is just as much chance that the whole idea could fall flat on its face.
.
.
.
I guess the last paragraph is our only hope.