Bill Gross on the Unending Securitization Debacle

♠ Posted by Emmanuel in at 3/03/2008 12:08:00 AM
In his latest piece, PIMCO's Bill Gross likens today's capital markets to a game of "Old Maid" where the objective is to pretend that all is well and hope that you can dupe someone else into taking your securitized riffraff. As always, Gross presents an entertaining and informative read. For him, worse is yet to come as securitized obligations other than housing get into trouble:

If you had the “Maid” the object was to dump it on someone else, but doing that involved numerous deceptions not totally unlike today’s shenanigans involving our capital markets and their imploding financial conduits.

Old Maid now has a second life mimicking our financial markets, and at PIMCO we’ve played it frequently in our Investment Committee over the past several months. “Who’s got the ‘Old Maid’?” we ask over and over again – not to make us feel good that we don’t – but to make sure we won’t draw it when its holder tries to pass it on. This shunned lady in asset form was originally identified as a subprime mortgage, aggregated into levered financial conduits which in turn were guaranteed to be AAA hotties either via their securitized structures or the solemn pledge of monoline insurance firms. No Old Maids in those hands, investors were assured; they were Babes with a stacked deck. Ah, but Father Time has a way of exposing plastic surgery and there have been implants aplenty in recent years. Most of the silicone to be sure involved mortgage-related assets – first the subprimes, then the Alt As, and now perhaps even levered primes. Yet those that claim that the Old Maid necessarily resides in a deck composed of mortgage loans are missing the larger point. This parlor game is best defined by leverage and not the assets that have been dealt out to more than willing players over the past decade. That subprimes have garnered the headlines is only because they were the asset class that failed first. Now as the U.S. economy slows to what Alan Greenspan labels “stall speed,” levered structures holding commercial loans, and auto and credit card receivables are the new Babes in waiting – waiting to be exposed for what some of them could be: Old Maids with collagen carelessly injected by Moody’s and S&P.