The WSJ has an interesting article today on the new financial product designed to repackage a bad loan into (sounds like tranches) into good and bad loans so they can have more favored capitalization.
The popular deals are known as “re-remic,” which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.
Ok – “Wall Street’s at it again” aside… on paper this sounds logical. But the regulators are resistant since it is predicated on ratings from the same agencies that gave AAA ratings to products that should have been rated CCC (junk) because they had used the wrong data (they didn’t have historical data on the new financial products).
These are the sorts of remedies that need to be put in place to restart the investor market to enable the mortgage market to work outside the government sector. But what has really changed since the meltdown? Not much.
James Surowiecki of the New Yorker, takes an exhaustive look at credit-rating agencies. Wall Street still loves them (probably because they can figure out ways to manipulate them like they did during the credit boom).
To date, rating agencies have been one of the least scrutinized participants in the systemic breakdown of the mortgage securitization process. Until everyone gets comfortable that the rating agencies grasp over these new products and use the right data this time, it seems like the regulators need to keep up the pressure. Its not the product that is the issue, it is the enabler of the product and the regulators are hopefully awake this time.