To the Editor:
I found it interesting that Mr. Seidman included himself on the list of those responsible for the current credit crisis for his role in fostering securitization while head of the FDIC and the RTC ["Washington People," Nov. 3].
I too was at the RTC during his tenure. As a member of the team on the securities sales and trading desk for four years, I was involved in structuring and pricing RTC-issued securities.
The 60-plus bonds issued by the RTC were instrumental in clearing out the overhang of single-family and commercial properties inherited from failed thrifts. Suggesting that this very successful program contributed to the current crisis is like blaming Ford Motor Co. for an accident where a drunk driver was involved in a fatal collision.
In the current crisis, the drunk drivers were the mortgage originators who seriously reduced underwriting standards while developing new variable-pay mortgage products targeting low-credit borrowers who normally would not have qualified for loans. Securitization was the vehicle for this pub crawl, not the driver.
Basic securitization should not be a casualty of this crisis. With sober and responsible drivers, securitization is an important form of intermediation and supports not only homeownership, but a broad array of beneficial consumer and commercial endeavors. It allows responsible financial institutions to refinance their portfolio loans and recycle the funds into new loans to creditworthy borrowers.
Without a properly working securitization market, the amount of funds available for mortgages, auto loans, and credit cards is severely restricted, as is the case today.
Many of our legislators and regulators are trying to fix the blame. The focus should instead be on fixing the problems that led to the current crisis. The fault lies not in securitization of mortgages and other consumer and commercial loans, but in a failure to properly ensure that the process of intermediation is not adulterated by substandard underwriting and negligible verification of borrower eligibility.
This requires diligent review and supervision by the regulators in the banking and securities arenas. The rules are in place for mortgage underwriting but unfortunately were not rigorously applied during the halcyon days at the start of this decade.
We do not need more regulations. We need a more disciplined and consistent application of the common sense rules that were the standard after the RTC sunset in 1995. Unfortunately, the epidemic of selective amnesia that swept the financial institutions and investment banks and, yes, the investor community post 9/11 makes diligent and consistent regulation all the more necessary.
Mr. Bernanke recently gave a speech detailing a number of well-thought-out proposals for resurrecting the securitization market for private-label mortgages. One would hope our legislators and regulators carefully review his ideas and do not throw the securitization baby out with the shoddy underwriting bathwater.
A side note: I was quite surprised to see my name on Mr. Seidman's list of the Dirty Half Dozen.
Apparently, Mr. Seidman did not hear or read the whole testimony I gave before Mr. Waxman's committee Oct. 22. Had he reviewed the record, he would have read that while I was asked to "rate assets the firm [Standard & Poor's] had no way of valuing accurately," my department refused to provide any "ratings" or credit estimates when data tapes were not available for analysis.
This fact was further substantiated by Mr. Gugliada, the author of the now infamous memo, in a Washington Post article published Oct. 23. "Gugliada said in an interview that he was following company policy, and that Raiter's department was the only one that refused to provide ratings without the detailed data."
While I am quite flattered to be on any short list that includes William Donaldson, Robert Rubin, Dan Mudd, and Alan Greenspan, Mr. Seidman's list is a pyrrhic recognition at best.Frank Raiter
Luminent Mortgage Capital Inc.
PhiladelphiaEditor's Note: The author is a former managing director of the residential mortgage ratings group at Standard & Poor's Corp.