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Educational Enews - Customizing a world of knwledge, one class at a time

July 2010

Timely Topic

On the forefront of regulation and risk, Securitized Products take the spotlight for this in-depth look at the global trends occurring today, and possibly in the future.

Ken’s Korner

This week, a major financial regulatory bill was signed on Wednesday by President Obama. Can 243 new rule-makings possibly have unintended consequences?

GFMI Update

Back in 2006, we cautioned you to keep a keen eye on credit…and then BOOM! In this aftermath, what ARE the skills you need to manage credit risk?

Upcoming Events

Timely public programs, scheduled prior to year end. Get the details on these events that will get you in-the-know!

Global Trends in Securitized Products
Robert McDonough and
Mayra Rodriguez Valladares

Ongoing tighter credit standards for individuals and businesses -- coupled with uncertainty about the impact of financial regulation in the US, the UK, and Europe -- have kept structured product issuance at a limited level. Very tight lending requirements have
prevented individuals and companies from taking advantage of historically low rates. This in turn has negatively influenced the issuance

and liquidity of structured products. Regulators on both sides of the Atlantic have proposed regulations requiring issuers to retain a first loss position interest in new deals, which has possibly also impinged upon new issues and liquidity in the ABS market.

Click here to read the full article...



	It may have taken almost two years, producing heart-wrenching worry about job loss and a myriad of other issues, but the financial regulation bill is finally here. Or is it? There are approximately 2,300 pages and over 200 new rules that have been delegated to regulatory agencies. (See table from WSJ.com1). The main question that comes to mind –“Did the politicians punt on their responsibilities or did they perform some Einstein-like wisdom delegating the responsibilities to the folks in the front line?” The answer partially lies in the underlying reasons for the credit crisis (see my article in our October 2008 GFMI Educational ENews: “The Perfect Storm” ). For example, many pundits blamed easy money by the Fed which created a low interest rate environment. Well guess what? Easy money is still here and low interest rates seem to be more of a fixture than most Wall Street economists had ever forecasted. Clearly, this aspect is not addressed in the new bill. On the other hand, lack of investor due diligence was also to blame as many simply didn’t do their homework. Another area at the core of the crisis was structured finance -- as many originators sold off all of a respective deal, including the first loss piece. Although there were other reasons for the crisis, e.g. lack of due diligence at the retail loan level, as well as greed by many bankers and risk management failures, this current edition of our newsletter focuses on credit and structured finance. The article on credit “Déjà vu All Over Again” looks at the fundamentals of credit.The article “Global Trends in Securitized Products” focuses on the recent trends in the structured finance market. What about the unintended consequences which may arise from the new regulations? For example, there is the new 5% rule in securitization where the originator will have to maintain 5% of the deal, or specifically, the first loss piece. What if the deal brings in a return that is higher than a required hurdle rate on a risk-adjusted basis assuming a 100% loss on the 5% piece? Maybe they’ll call this the “Steinbrenner rule.” After the implementation of the luxury tax in baseball, Steinbrenner continued to spend -- and willingly paid the tax -- in order to win! This may be hard to imagine, but nobody expected to see a black swan either! And the final answer to the question -- "did the politicians punt or produce Einstein-like wisdom?”…….well let’s just say that given 2,300 pages and over 200 new rules, there is a high probability of changes to the changes. But weren’t valuations of CDO’s also based on probability models? Stay tuned… Ken President and CEO

Need internal learning programs on Structured Finance or Credit?

Our professionals deliver instructor-led programs worldwide. Each event is tailored-fit to our clients needs and objectives.

Call 516-935-0923; or email us at: consult@gfmi.com

Our Newest GFMI Member

A good portion of you have already had the pleasure of either meeting or speaking with
Marcy Katz – GFMI’s newest member, and Manager of our Consulting Services team. A Wall Street veteran – as with all other GFMI employees and Subject Matter Experts – Marcy hails from HSBC where she was a SVP for over 18 years in foreign currency sales. Marcy joins us in servicing the growing needs of our clients, and our ever-expanding client base -- both for Instructor Led, Online and other custom solutions. She’s a resident of Long Island and graduate of George Washington University, avid tennis player, skier and mother of two sons.

Please feel free to contact Marcy, anytime you have a question or would like to catch up on either your learning needs, or what’s new in the financial educational world.
Marcy’s direct line: 516-622-1168 or mkatz@gfmi.com.

Welcome to GFMI, Marcy!

Déjà Vu All Over Again?
Julie Barnum and
Henry Pullman

In our February 2006 edition of GFMI Educational ENews, we raised the subject of proper returns and structures for lenders and debt investors during a period of time when we were enjoying a mellow credit environment. We cautioned that one should avoid viewing the debt markets with rose-colored glasses, and appreciate that the cycle can swing -- and possibly swing wildly again -- as we had seen in the dark days of heavy defaults and weak recoveries in 2001-2002.

We don’t mean to pat ourselves on the back, but the cycle surely did turn, and the blood-letting and red ink were worse during the past couple of years than in the earlier downturn. That’s not to say that we are forever subject to a boom/bust scenario in the credit markets, but we need to be sanguine about the potential for changed conditions as we come out of the downturn and again dip our toes in the water. As we entertain term deals, what specifically should we be doing, to best manage these risks?

1. Trite as it may sound, good credit skills don't go out of fashion. Let's appreciate that the biggest failure in our analysis has always been an inability to realistically forecast the future. Do we believe those hockey sticks that issuers/sponsors present to us? It is not a game of simply playing with numbers (how much of a haircut is needed to be applied to those optimistic management projections?), but getting to understand our credits. KYC is not just an acronym that regulators throw around. KYC at its best is in-depth due diligence, and -- in fact -- often KYC turns into KYCC (Know Your Client's Clients)
2. Let's stick to our guns on documentation. Are we too quick to ease our standards on covenants, or not exercise the rights we enjoy by virtue of a tripped covenant? And, since when is change of control not a given?

Click here to read the full article...

UPCOMING PUBLIC
EDUCATIONAL EVENTS:

GFMI is pleased to bring to your attention these outstanding learning events, which are being held by S&P Valuation and Risk Strategies, as well as the Asset Managers Forum. All public venues, we have included the hyperlink for your convenience, for more information or to register for these programs

The following courses 4 courses are offered by S&P Valuation and Risk Strategies:

Developing a Corporate Credit Rationale
Sept. 22-24, 2010 / New York, NY
For more information on this program, or to secure your seat, please visit them online:
Learn More

    Oct. 5-6, 2010 / Sydney, Australia*

Surveilling and Valuing Structured Finance Assets
    Nov. 17-19, 2010 / London, England*
    Dec 15-17, 2010 / New York, NY*
* For more info, email -
sp_marketing@standardandpoors.com

This one-day event is offered by the Asset Managers Forum of SIFMA, It is open to both members and non-members:

Introduction to Credit Default Swaps
    Sept. 24, 2010 / New York, NY
For more information and to register,
please visit them online: Learn More

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