Fate of Structured Credit Company?

[kr]

Friend of mine spent several months pitching his bank's board to enter into intermediation business for the SCA branch - that would be the CDPC wrap-driven thing. But they lost their AAA right out of the blocks so there is no point - nobody wants a gtee from a non-AAA entity right now.



Maybe I'm cynical, but I'd say this is the part of the movie where the rebel upstarts begin to lose. The Old Order (i.e. incumbent banks) can afford to lose 25-30bn amongst themselves. A lot of the struct credit business begun in the last 3 years will go through a huge retrenchment and it will be a while before they re-emerge. That's the part of the story which I think is sad. The fact that so many of the rebels were brought down by the poisonous product offering from the Old Order isn't sad, it's just shameful human weakness. CDO of RMBS, CP senior, weakly-equitized warehouses, RMBS of sub-subprime, I'm not saying it was all misguided but the sector moved towards such a narrowly-defined story in terms of good vs. bad, the rebels should have known when to stay away from the strychnine. Again we have reflexivity. I think of Dynamic Credit in those CDO confs, with all that analysis of relative value, when the big-picture concept was often completely wrong... look where they are now.



I am vulturing another leveraged player in a related territory of devastation (financials credit) - they had a good business plan but there was a famine. The right strategy would be to starve the equity of dividends, go home early for a couple of years, and just wait for the business plan arb hurdle to return. I started to think that something is definitely missing in the incentive structures of deal sponsors that really does emphasize getting paid now rather than later, even though all equity people will tell you 'they are in it for the long term.' Next time you see these people, ask them how their incentive structure aligns them. Maybe it's a vesting thing, if everybody goes through the revolving door to get paid servicing fee income for whatever is paying now vs. later, they are facing minimal 'reinvestment risk' - i.e. never have to wait for the good stuff to show. If (probably I should say 'when') I return to buyside I will have an indoctrination ceremony for new employees and some proper religion about equity shares.

[Skillionaire]

kr, couldn't agree with you more in terms of the attrition that is and will continue to be taking place in this industry.  When it comes down to it any company that can survive will have a massive presence in the industry by default - I'm guessing that 70-80% of the mid-sized players (startup financial guaranty, small to mid-sized money managers, servicers, originators) will be out of business within the next three years.  That being said, anyone who survives (in whatever method/shape/form they need to take to do so) is going to look like a genius and will have a nice chunk of the market.



Of course, ALL mid-sized players could go the way of the dodo bird (which isn't that far-fetched of an idea) and then The Old Order shall reign supreme again.



BTW, Moody's (in their latest downgrades on Thursday) had a line in there about re-evaluating their assumptions used to rate CDOs.  When they come out with that downgrade list (probably another month or two), you're going to see WARFs in excess of 7000-8000.  The highest I've seen yet is 4070, but that's with CDOs having been lightly touched by the RA as of yet. 



It's fugly right now.



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