A Blinding Grasp of the Obvious

The other day someone who I respect a lot said something that was really quite remarkable.

He didn’t say it with any particular amount of drama, or build-up, as if it was something he’d thought about for a long time, and had finally reached a conclusion and had to spit it out. He said this, almost in passing:

“You know, the only transactions that are going to get done nowadays are those with government guarantees.”

Upon reflection, he’s quite right.

The evidence is all around us. According to Thomson Reuters, asset backed securities (ABS) volume declined 82.2% during 2008. The market for mortgage backed securities (MBS) declined 80.2%. Total residential real estate securitizations declined 95.1%. Dismal as they are, even these numbers are misleading in that they include deals from the first half, before shock and awe set in. The fact is, volumes in the forth quarter were virtually nil.

And while I am sure my friend’s conclusion is correct, I’m not sure of the reason why it’s so. Perhaps it’s because there’s so much TARP money out there in so many different forms, that fiduciaries would be foolish to not purchase riskless securities that gave them a 150 basis point premium over Treasuries. If that’s the case, it’s just a matter of time before we burn through the liquidity in pipeline, and once primed, things get back to normal.

But let’s say we burn through several hundred billion in government guarantees, and the pipeline is not primed, then what? Then – to borrow a page from my friend who has a blinding grasp of the obvious – then we go back to zero volume. And then we know that the only emotion left in the market is fear.

Personally, I don’t think it will come to this. The multiplier effect on $700 billion is just too large.

But meanwhile, while we await our fate, issuers and would-be issuers should take note of these historic times. The government, who was always your partner when it came time to splitting up profits, is now your partner when it comes to sharing and bearing risk. And to me at least, it’s quite obvious, that we’ll never, ever see a deal like this again in our lifetimes.