During the past three months, the financial press has been full of observations of industry specialists and commentators concerning just how long it will take before the asset-backed and mortgage-backed securities markets are restored to some semblance of normalcy. Estimates offered by people who usually know what they are talking about range from at least a year to up to three years. In light of the size of these markets and the large number of people whose lives and livelihoods have been affected by the meltdown, it is not surprising that there is such constant focus on how long it will take.
What strikes us as surprising, though, is that there has been much less focus on how the next iteration of these markets will differ from the markets we have come to know over the past two decades. An important, but overlooked, possible difference may be that the financial institutions and investment banks that have provided the warehouse lending necessary to facilitate securitisations are likely to step away from this line of business. There should be fewer committed warehouse lenders and significantly higher collateral levels for those entities that can obtain warehouse financing. The implications of this development could be profound. It may be that the only entities that will reliably and confidently be able to effect MBS/ABS securitisations in the future will be those that are, or are affiliated with, depository institutions, which have access to relatively predictable and inexpensive funding. If this turns out to be the case, the markets and the key players will be more reminiscent of those of the mid-1980s than those of 2007, oddly enough. Maybe disco will live again too.