Panel Discussion on

 Trading and Secondary Market Issues

12th Annual U.S. CDOs, Credit Derivatives & Structured Credit Products Summit:  Where Do We Go From Here



Remarks by Richard Field, Managing Director of TYI, LLC on March 12, 2008


Good morning.  I would like to focus on how transparency is going to be the catalyst for you to make money in the secondary markets during these turbulent market conditions.  With loan by loan detail on a daily basis for each structured finance deal, fundamental data driven pricing will return and the trading price range will become anchored by actual collateral performance.


In 2007, the “World Coming to an End” trade profited from opacity in the secondary market.  The trade itself involved shorting anything with an exposure to sub-prime and going long U.S. Treasuries.  The traders who made money on this trade realized price and value were disconnected.  At a macro level, sub-prime mortgages were not performing as well as expected in the valuation and pricing models used by the securitization industry.  They also realized that ongoing reporting of the credit deterioration in sub-prime mortgage performance would act as a catalyst to discredit these assumption driven models.  This catalyst became apparent in August 2007 when PNB Baripas froze several funds because it was unable to get pricing on the funds’ securities. With no data about the actual performance of the pools backing each asset backed deal, the market turned to index based pricing.  This soon became discredited as quoted ABS prices spiraled with no logical stopping point downwards towards zero.  The indexes, particularly the ABX index, reflected the rising fear driven cost of credit insurance and not actual loan or pool level performance.  Lacking any trusted pricing models, a buyer’s strike and liquidity crisis began.


Recently, companies have begun circulating bid lists.  Some are circulating bid lists so they can show their auditors that they have written down the value of their holdings to prices where there is sufficient demand that they could sell their portfolio.  Others because they can no longer meet margin requirements as collateral haircuts have risen against even the best assets and they have to sell.


What is the profitable trade in 2008?  The trade in 2008 is to identify individual securities that will have a significant change in price when there is transparency into the actual performance of their underlying collateral.  Transparency is the catalyst to reconnect price and value.  Transparency allows market participants to use the analytic and pricing models of their choice to value the securities.  With transparency, fundamental data driven pricing and its related buying and selling will replace fear of the unknown pricing and the buyer’s strike.  After a one time adjustment in price level, prices will settle into a trading range anchored by actual performance history, a characteristic of deep liquid markets.


What is transparency?  The gold standard for transparency is easily accessible and usable real time, standardized loan level detail on the underlying collateral over the life of the deal.  This standard guarantees that fundamental data driven pricing will exist while a deal is in the secondary market.  For ABS securities, the most accurate real time collateral information is the close of business yesterday.  Standardization of loan level detail is necessary so that market participants can compare deals by issuer, between issuers and value CDOs.


Can the gold standard for transparency be implemented today?  Yes, we live in the information age and a proven transparency based information solution has existed for over a decade.


What is the cost of transparency?  Significantly less than the 25+ basis points it has been estimated that Investors are charging Issuers of the best asset types as an opacity premium in early 2008.


When is transparency going to be implemented?  This year.  Regulators are clamoring for greater transparency.  To avoid regulation and save the opacity premium, Issuers are actively looking at providing transparency.


Investors need transparency to know what price they should buy at and what price they should sell at.  Issuers need transparency to alleviate the paralysis in today’s secondary market and to create primary market demand for their securities.  Traders need transparency so they can put capital at risk to profit from short term price fluctuations within a price range anchored by actual performance history.  It is only with transparency that a deep, liquid secondary market can truly develop.


Developing this deep, liquid market will only come about as transparency becomes the standard in our industry and the benefits of transparency are shared by all of the market participants.


Thank you.