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August 27, 2014

Fixing the ABS Conveyor Belt for Toxic, Worthless Securities

Washington, D.C. August 27, 2014 — Today, the U.S. Securities and Exchange Commission unanimously adopted a final rule that appears to be a significant step forward in reforming the securitization market, which was at the center of the financial crisis of 2008, said Better Markets. Dennis Kelleher, President and CEO of Better Markets issued the following statement in response to the SEC’s ABS rule:

“The securitization of asset backed securities (ABS) acted as a conveyor belt for toxic and worthless securities throughout the globe, which was a key reason for the financial crash in 2008.  That’s why the rule the SEC announced today is critically important.  Although the final text is not yet available, the rule appears to  substantially improve the disclosures that must be made to investors in ABS.  For example, the information that investors will receive about the assets underlying these securities will be more detailed, more useable, and more timely, enabling investors to evaluate the investment offerings in a meaningful way.  In addition, through certifications by the principals involved, the information is likely to be more reliable as well.

“These are critical changes.  The crash of 2008 was fueled by trillions of dollars in residential mortgage ABS that were  full of subprime mortgages doomed to default.  Even sophisticated investors were ill-equipped to evaluate those complex and opaque offerings, lacking the necessary timely data to assess the quality of the assets pooled in the ABS.  As a result, Wall Street’s biggest banks, abetted by  credit rating agencies slapping triple AAA ratings on essentially worthless investments, were able to flood the global market with worthless securities, which, when revealed, collapsed the financial system and almost caused a second Great Depression.  The ABS rule will improve transparency and reduce the likelihood that ABS can be sold and unloaded on unsuspecting investors.

“However, the ABS rule is just the first step necessary to fix the egregious abuses in the securitization marketplace that inflated the subprime bubble and spread it around the globe.  The SEC must also pass strong, effective rules on risk retention and eliminating conflicts of interest.  In the Dodd-Frank financial reform law, Congress required issuers of ABS to retain some of the risk of their investment offerings—so-called keeping some “skin in the game”—so they have an incentive to choose assets more carefully and to monitor their performance more closely.  The SEC has proposed the rule, but it must be strengthened and then finalized.  No amount of disclosure in today’s ABS rule will give Wall Street’s banks this type of incentive to ensure that they are packaging, selling and distributing properly valued economically viable ABS.  In addition, the SEC must finalize a rule that will prohibit issuers from betting against their own ABS offerings—an appalling practice that also contributed to the crisis.”

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