For the securities industry, attempts to self-regulate may come too late

The securities industry is surfing what looks to be a tidal wave of regulatory reform, hoping to stay ahead of the deluge. Today industry groups around the world released a coordinated report on how to rebuild confidence in securities and improve practices in their markets, in a hail-Mary of self-regulatory fervor.

The tome, put out by the American Securitization Forum, the Securities Industry and Financial Markets Association and other similar groups in Europe and Australia, lays out the causes of the financial crisis: lax underwriting standards for lenders; too much optimism among credit rating agencies; too much leverage; a too-forceful carry trade, and not enough of a sense of collective responsibility. These things, the industry says, need to change, although "No single action or combination of actions the industry can take is likely to be sufficient, in the near-term, to return the securitization market to a normal level of functionality, let alone to restore it to the level of the last few years. The damage caused by the current crisis will take time to repair."

But try they will-the report recommends promulgating standard definitions and procedures for different kinds of mortgage-backed securities. Investors should be able to learn more about the contents of a securitized package of loans, including not only their credit quality but also details such as whether closing costs were financed, whether the loans were originated by mortgage brokers and whether the borrowers were first-time home-buyers.

The transparency problem, according to the report, ran deepest in the residential mortgage-backed securities market. Asset-backed securities and commercial mortgage-backed securities had better standards for determining creditworthiness. And US government guarantees on debt such as student loans made the securities safer.

The industry also came down hard on collateralized debt obligations, securities that pooled mortgage-backed securities and sliced them up into bond-like instruments which could be distributed separately despite their reliance on the same pool of loans. These were too complicated and hard to document, the ASF and SIFMA now believe.

Even as the securities industry was doing its own housecleaning, regulators seemed to be closing in.

Well, one of them at least.

The Securities and Exchange Commission proposed a set of rules for greater oversight of credit rating agencies, which were often the cheerleaders for CDOs and regular MBS alike. The new rules would have the rating houses disclose random samples of their ratings and the histories behind their decisions. It would also prevent them from rating products that were paid for by any institution involved in their creation, such as a sponsor, issuer or underwriter, unless all other rating agencies can also see the information on the product.

It´s hard to say whether the new rules and suggestions will make a difference, especially since there are few securities around right now to trade or rate, and those that are most appealing are guaranteed by the US government. But whether self-interested or collectively scared of going out of business, industry players are concluding that they can´t go home again.

And whatever the future of the SEC may be [link to previous post], it is gesturing grandly now, heralding a coming year full of new rules for even the most complicated of games.