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Posts Tagged ‘Wall Street business model’

Retaining Risk on Wall Street: Necessary but Painful

Posted by Larry Doyle on November 5th, 2009 1:03 PM |

How did Wall Street lead the United States economy into the ditch?

The pure ‘originate to distribute’ model employed on Wall Street spelled the death knell for Wall Street and our economy.

I addressed how firms won under that originate to distribute model in a commentary from November 12, 2008, “The Wall Street Model Is Broken….and Won’t Soon Be Fixed!!”:

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check). WOW!!! What were we thinking?? Well, Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Tomorrow has arrived and Wall Street must now deal with the concept of retaining risk in their loan originations. The topic of ‘risk retention’ has been bandied about over the course of the year, but it was ratcheted up dramatically in a recent meeting of the House Financial Services Committee and U.S. Treasury on October 27th.

What came out of that meeting has potentially dramatic implications for the entire spectrum of loan origination, securitization, and distribution businesses on Wall Street and their subsequent impact on Main Street. Let’s navigate. (more…)

Tags: 12th Street Capital risk Retention in Securitization, asset securitization, banking regulators, House Financial Services Committee, impact of risk retention, Obama's Financial Reform Plan, originate to distribute model, originating and underwriting on Wall Street, originating underwriting securitizing, originations, risk retention, SEC, securitizations, U.S. Treasury Department, Wall Street, Wall Street business model
Posted in 12th Street Capital, General, Risk, Wall Street | No Comments »

The Wall Street Model is Officially Dead

Posted by Larry Doyle on June 16th, 2009 11:49 AM |

Dear friends, family, countrymen,

We are gathered here today to lay to rest a business model which revolutionized our financial industry. I have fond memories and knew the legendary “originate to distribute” well. In fact, I welcomed the opportunity to share the background and development of this model last November 12th, in writing “The Wall Street Model Is Broken….and Won’t Soon be Fixed.”

Regrettably, those charged with nurturing and protecting this model, in turn, cannibalized it. As such, today we officially gather to bury it. Tomorrow, President Obama will announce new guidelines and oversight for a new securitization model on Wall Street. The Financial Times provides a uniquely balanced perspective on this new model, Treasury Plans Strict Rules for Securitization:

The US Treasury is planning a sweeping overhaul of securitisation markets with tough new rules designed to restore confidence by reducing the incentive for lenders to originate bad loans and flip them on to investors.

The authorities plan to force lenders to retain part of the credit risk of the loans that are bundled into securities and to end the gain-on-sale accounting rules that helped spur the boom of the markets at the heart of the financial crisis.

Sounds like a very good idea. Clearly the model needed to be ‘reborn’ given the massive abuses and fraud which were promulgated under the prior model. Recall that the prior model, also designated as the “shadow banking system,” embodied 40-45% of the total credit injected into our economy. Can we raise a strong, disciplined, and well behaved “model” to replace that void? I have serious questions.

As we assess the potential for the “new securitization model,” we need to understand how the “prior model” grew so large. Well, not unlike the abusive practices employed by professional athletes with steroids, our “old model” also cut a number of corners. In so doing, the “old model” mispriced the true risks of a wide array of loans originated over a period of years.

The “new model” will look to address the proper pricing of risks in loans. How will it accomplish this proper pricing? (more…)

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Posted in General | 5 Comments »

The Wall St. Model is Broken . . . and Won’t Soon be Fixed!!

Posted by Larry Doyle on November 12th, 2008 12:15 PM |

Despite billions and now trillions of dollars in capital injections and equity investments made by our government, private equity, and sovereign wealth funds, our economic turmoil is a long way from being over. I do find it interesting that despite numerous Wall Street titans having indicated to us at different points over the last year that we were in the 7th inning of this fiasco, now a recurring theme is that we should not expect any real economic recovery until 2010. Actually, maybe we were in the 7th inning but it was the 7th inning of the first game of a 4 game series.

Well, if we want to figure out where and when we are moving forward, I think it would be beneficial to know from where and when we came.

For those over 50 years of age, perhaps you remember when mortgage money dried up. Perhaps you also recall the days of putting down 20% before you even thought of buying a home. In any event, the growth of the secondary mortgage market in the mid 1980s was a result of some very sharp financial minds on Wall St. who engineered a product called a Collateralized Mortgage Obligation (CMO). (more…)

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Posted in American Consumers, Banking Institutions, Current Affairs, Economy, Housing Crisis, Mortgage Crisis | 13 Comments »