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Friday, 25 April 2014

The road to Zimbabwean RMBS

SwissInvest strategist Anthony Peters wonders where the next crisis will come from

Anthony Peters, SwissInvest Strategist

TWO YEARS FROM now, in August 2014, we will be commemorating the outbreak of the Great War – the war to end all wars. Two and a half decades after its outbreak, it had been renamed the First World War because humanity had decided to do the same all over again, simply with more technology and on a grander geographic scale.

In July 2007 we began a process known as the Credit Crisis, which brought the banking system and subsequently the global economy to its knees. So far, thank heavens, nobody has yet had the courage or naivety to call it the crisis to end all crises.

The admission by BNP Paribas in August 2007 that it had funds that were up to the gezoolies in sub-prime RMBS but that it didn’t have a clue what the securities were really worth was perhaps the moment the crisis began.

Michael Lewis’s book, “The Big Short – Inside the Doomsday Machine”, gives an adequate account of how the bubble inflated, how predictable it’s bursting was and how those who called that bubble busting made out like bandits while the rest of the financial world went to hell in a handcart.

The recent dragging up of Bear Stearns and its sub-prime securitisation efforts by New York prosecutors – I was brought up that one should not speak badly of the dead – proves nothing other than what we already know, namely that asset-sourcing got well out of hand in meeting the endless demand for yield when there wasn’t any left in the system.

Does anyone care to remember “originate to distribute”? All the banks were doing it; it was as much a demand-fed asset acquisition frenzy as anything else. Never mind the quality, show me the yield!

SO WHICH WAY do we break next? Is the ABS/CDO bubble about to reinvigorate itself? I think that is pretty unlikely. We have sped from one bubble to the next over the years but we have very rarely, if ever, succeeded in getting a burst balloon to re-inflate.

Japanese equity warrants, dotcom stocks, CDOs squared … they came and they went but they never came back again, despite all the efforts of those who had grown rich riding the wave.

When you see the first Zimbabwe RMBS at Libor plus 50bp, sell everything and retire

The fact is that while the credit crisis took hold, it pricked so many bubbles that it’s hard to count them. There was a period in the mid-2000s when you couldn’t pick up a paper without reading of another FTSE 100 company being stalked by a firm that insisted that its suits, with their MBAs and CFAs, would be better at running an engineering group or a pharmaceutical company than were the engineers or pharmacologists.

They called it private equity, talked lots about “shareholder value” but in reality the only shareholders they had any interest in was themselves.

Not to mention the fact it had nothing to do with equity and was all about debt – I can still hear the PE guys fighting with the CLO guys as to who was the chicken and who was the egg in the money machine.

As much as the hordes of residual and underemployed structuring people would like to be out there flogging mezzanine and first-loss or equity tranches of credit structures again, it simply isn’t going to happen.

WHEN ASKED ON the wireless whether banks were prepared to prevent a recurrence of the crisis that befell them, Professor John Kay answered that the last crisis would not reoccur but that nobody was properly preparing for the next one.

When pushed further as to where that crisis would be, he thought the sovereign space was next. This need not be the eurozone crisis alone but recent bond issues in the sovereign space in, say, Africa pose a risk. Sure, today only a tiny minority buy the issues but if they fail to default, it won’t take long until the world and his wife is out there chasing the names.

Zambia issued US$750m at a spread of “only” 383bp last month and still nearly got flattened in the stampede.

Before long, the Zambias and the Ghanas will be the place to be and so-called risk-averse investors will be throwing cash in their general direction. Then, when you see the first Zimbabwe residential mortgage backed deal at Libor plus 50bp, sell everything and retire … the next crisis will be upon us.

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