Disclosure in the European ABS Market

October 6, 2008

The far-reaching effects of the U.S. subprime crisis have brought into focus the efficacy of information flows in the securitization industry - and found them wanting. The chickens came home to roost when the shock waves of an essentially U.S. home loans problem were widely felt in Europe and beyond. The trend has been toward ever more complex products backed by opaque and fluctuating asset pools leading to increased reliance on the ratings of credit rating agencies rather than on an investor's own analysis. Institutions, and particularly banking institutions and their regulators, suddenly found a need to delve more deeply into the exposures they held on their books. They will have found that in the cases of many types of investment this is not actually that easy, hence the increased reliance on credit ratings. The difficulty is that credit ratings only look at a narrow range of the factors a prudent investor will look at in assessing an investment and the ratings themselves are a crude range of pigeon-holes into which to put a raft of different types of investment. One triple-A rated investment may be very different from another in all sorts of ways. Disclosure is the key to valuation and valuation is the key to understanding exposure. This should have been obvious, but it appears it was not. The pleas from various quarters that they did not know they had sub-prime exposure shows that.

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