The SEC has approved a proposal that would prevent a lender from shorting an asset-backed securities product or from putting together a security with a third party if there was an intention to bet against the security. But the expectation is that if introduced, it will have no effect on the severely reduced US ABS market.
“The rules appear to be addressing derivatives on asset-backed securities – and really those don’t exist anymore,” says one head of ABS origination at a US bank. “There is no readily available way to short credit-card ABS or to short auto-loan ABS, so the proposed rule would have little impact on the current ABS market. The rules seem to be addressing the unique Abacus situation, and it is unlikely that could happen again.”
Goldman Sachs was accused of packaging mortgage securities to sell to a client without disclosing that those securities, via the Abacus CDO, had been handpicked by another Goldman Sachs client – hedge fund Paulson – that was betting on a default. It resulted in Goldman paying a $550 million settlement in July last year.
The ABS market is a shadow of what it was before the financial crisis now that the sub-prime market has gone. Up to September 21 this year just $81.5 billion had been issued in US dollars. That compares with more than $1 trillion in 2005 and 2006. The euro-denominated ABS market is even quieter: year-to-date €16.3 billion had been issued in 34 deals.
For a start, asset-backed paper has a maturity of around 1.8 years to 3.5 years at the moment and the rules are not expected to be implemented until the second half of 2012 at the earliest, by which time most of the current issues will be far along in their lifespan.
The SEC approved the proposal, saying it “would prohibit securitization participants of an ABS for a designated time period from engaging in certain transactions that would involve or result in any material conflict of interest”.
