Shapiro to the rescue of credit cavaliers

From Jonathon Shapiro at the AFR:

Friday’s $1 billion sale of mortgage backed bonds by Firstmac is a big deal for more reasons than one. First and foremost it’s the clearest sign yet that the non-banks whose business models rely on access to cheap and abundant wholesale markets, are back as a force, to at least nip at the heels of the big banks. But the deal touches on other facets of our home loan market, financial system and the government’s muddled budgetary mindset.

The bond issue marks the first time a non-bank had hit the billion mark with a bond issue with the main tranche pricing below 1 per cent over the bank rate. The securitisation market is almost back to its glory days of June 2007, when Firstmac raised $1.3 billion from overseas investors.

…So Tuesday’s budget announcement that the government would liquidate the $4.6 billion it holds as part of this programme came as a shock to many in the industry, in particular Firstmac chief financial officer James Austin said the blood “drained from his face” when he heard the announcement, fearing it would derail his deal and stall the recovery of the RMBS market.

Bit of contradiction here, no? If the securitisation market is “almost back to its glory days” then why is the prospect of the government exiting it so horrific?

The answer is that the market is nothing like almost back to its glory days. 1% over swap is still a very wide spread when compared to 2007 when deals were being done at under 20bps over swap. And there is only enough new RMBS activity today to see the market treading water or offering minimal growth:

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Despite this, exiting the market is exactly what the government should be aiming to do. Arguably it should never have bought RMBS in the first place given the moral hazards that that entails. Funding basically unregulated credit cavaliers is not my idea of good policy.

It might also be argued that the securitisers should carry their fair share of the macroprudential tightening slowly underway around the banks and increasing the supply of RMBS is a way of doing just that.

I’m not going to argue against Mr Shapiro’s line that this is more ad hoc government tinkering to improve the Budget. I don’t know if that is true.

However, the end result does not seem at all unreasonable.

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