Why does a business model become untenable overnight?
What was previously a winning model has become instantly bereft of merit in the eyes of investors.
In September 2007, Anthony Ryan, assistant secretary of the Treasury for financial markets told Congress said that just as species can become extinct so can financing techniques. At that time the focus, clearly was on securitization markets and in particularly collateralized debt obligations. These tools were, alongside credit derivatives, blamed for separating the originators of risk from holders. This was a bad thing and should never happen again.
To a large extent the originate-to-distribute model, pursued with such vigour over the past decade, was predicated upon securitization. Is it really possible that banks would have to dramatically change the way they operate and return to tradition – and hold assets on balance sheet until maturity?
Then there was Northern Rock and the now infamous first bank run in the UK for over 150 years. Now there was another stick with which to beat financial institutions. Any bank with an over reliance on wholesale funding was deemed dangerous. The fixation on banks’ loan to deposit ratios now borders on obsession. The proponents of this new orthodoxy suggest that no substantial funding gap should be allowed.
So what does the new world order look like? The new version of the Bretton Woods financial system will help provide the answer but so far it seems that activity in securitized products, and structured credit and credit derivatives, in particular, will be clamped down upon.