Small and midsize banks are stepping up their investment in asset-backed securities just as the market is becoming more risky, according to people at a conference here.
The market for asset-backed issues is "unbelievably frothy," said Patricia A. Jehle, senior managing director at Bear, Stearns & Co. "Discipline in the market from five or seven years ago has dissipated."
Banks have increased their presence alongside insurance companies and money managers in buying asset-backed issues since December, when the Office of the Comptroller of the Currency eased the rules governing securities investment by banks. Investors said that though it's impossible to quantify banks' purchases of asset-backed securities, there has been a noticeable rise.
"Small and midsize banks are buying more," said Julia Landes, vice president at Harris Investment Management, Chicago,. "It's become a more crowded market."
While investor demand is driving the market to unprecedented heights, some investors at the Strategic Research Institute-sponsored conference raised concerns that the market is becoming overheated.
"There's a buying frenzy," said conference chairman John R. Wilson, managing director at Prudential Structured Finance Group. "This is going to be a problem in the future."
Neil Baron, vice chairman and general counsel at Fitch Investors Service, said investors are more exposed than ever to the performance of issuers.
In the 1980s, he said, mortgage-backed securities still paid off when thrifts failed, partially because of government guarantees. And when securitized credit card portfolios show stress, as Banc One Corp.'s did last month, banks can generally replace the sour loans with other assets to shield investors from loss.
But today more exotic assets, such as franchise fees and subprime auto loans, have entered the market. Thus, the payoff to investors can sometimes depend on an issuer's ability to "get a customer's car at 3 in the morning and sell it," Mr. Baron said.
To date, small and midsize banks have been buying mainly mainstream securities backed by auto loans to people with good credit, credit cards, and other relatively dependable assets, said a managing director at a major insurance company. "But it's only a matter of time before they go for the exotic stuff," he said.
Banks seeking quality assets on the securitizations market may find they are hard to find. Dennis N. Cantwell, vice president and treasurer at Chrysler Financial Services, said his company-previously a big securitizer- began using private conduits last quarter.
Analysts of asset-backed securities are suggesting investors consider assets that aren't so sensitive to consumer credit, such as farm-equipment and recreational-vehicle loans, said Nichol M. Bakalar, senior associate at BancAmerica Securities Inc.
"Advising banks has become a big thing for our middle-markets group," Ms. Bakalar said. "There's lots of work to be done."
