Thursday, January 14, 2010

Ethan Penner - "Completely Reformatted"

The "inventor of modern day CMBS" was out a year ago highlighting that securitization was not THE problem at all (nothing to see here, people), and then more recently he actually has changed tack and proposed changes to securitization such as retained interests. Read the second half of the article though - most of it is just spot on.

I couldn't disagree more regarding this tired "retained interest" argument. Retained interest and Pfandbrief bond structures would not have prevented the current issues at all. Take a look at the retained interest model used in Auto ABS, or better, subprime Auto ABS - value interest near $0, pass costs onto other bond investors, make more risky loans. The current model where the special servicer buys the b-piece actually works much better - it mostly failed because they got competitive and started reselling the risk into CDOs (the market has effectively stopped that). Special servicer takes first loss risk, manages problem loan portfolio, receives fees for working out problem loans and from cash flow on bonds.

This guy is a really smart guy, and has more CMBS experience than just about every single other person in the market.

Penner experienced a meteoric rise of his own at Nomura Securities Co. in the mid-1990s before his sudden departure in 1998 amid a spreading Asian financial crisis.

... oh yeah, that Asian financial crisis. I don't know shit from shinola, but his departure may also have stemmed from the nine-figure loss he amassed in just six months at Nomura, and was followed just weeks after his resignation by a complete shuttering of the CMBS operation there. AND, followed for years by multiple violation of reps and warranties lawsuits that successfully put back multiple loans to Nomura that resulted in huge losses.

Doctor's Hospital by itself was a $50mm loss, on a senior mortgage that was something like $49mm - made on a hospital that had appraised in the single-digit millions just before the loan was made (just 18 months before his resignation)! This one loan took something like 10 years to play out, so the losses that could be tied back to actions that he oversaw, are actually substantially higher than what you read about.

I really don't have anything in the world against the guy, but if you're going to allow press releases that go out showing all the shiny stuff, flip flop on what you say year-to-year, and then not acknowledge the flip-flopping and prior errors that are fairly substantial and at least something an investor in one of CBRE's funds might want to hear both sides about... Well, someone is going to say something. And it might be me, and it might be anonymous. But, I'll make a deal - let me know if anything is wrong here, and I'll retract it and apologize about it. I'll even send a gift basket with shinola in it to any offended party.


crabsofsteel said...

I know Penner's loans quite well, having done deal surveillance for Nomura when they got back into the market the 2nd time. Many were crap (i.e. Doctor's Hospital), but most were good so most AAAs were money good (sorry about ASC 97-MD7). But that's neither here nor there. I will say that if anyone is capable of knowing crap underwriting, it is Penner, and he redeemed himself (to me at least) by coming out in support of S&P when they tightened the screws.

Dark Space said...

Hmmm, you're not asking for the Shinola gift basket are you?

Nomura's loans have performed worse than nearly EVERY other originator in the CMBS world, and definitely had the lead as worst performer from the time period when he was there.

S&P had to right their ship, but I didn't witness any logic applied to S&P's rating actions over the last year. It was as illogical as ever. Lest we forget the downgrade and then upgrade of GG10 inside of a week, and a TALF subscription week at that - it's hard to not reach for the tin foil hat on that one.

Even today, I wouldn't claim support for any rating agencies' actions outside of Realpoint (rating change report = 50+ pages in many cases; big3 are typically 1 - 5 pages). The only option the others have to do is downgrade - too much risk to upgrade even if it makes sense (unless you downgraded it last week, then why not). Until they come out with some transparent and logical analysis, they're useless.

crabsofsteel said...

I will gladly accept your shinola basket provided that you do not include any AMs or AJs.

You're right; Penner's loans sucked worse than most others but his collapsed in an environment where BBB spreads blew out. Now AAA spreads have blown out. Think about the consequences.

The market rightly viewed the S&P revisions as suspect but think about what they revised: bonds that were only a few percent or less of a given deal. Who cares? It's the 85%-of-deal AAA money-good rating that counted. S&P were first to the table to say they fucked up. Fixing things when you've fucked up isn't always easy, or logical. We're still waiting on Fitch.

Realpoint are very good at surveillance. They also tend to be optimistic. The problem with buying a CMBS bond is that you are loaning money to 200+ borrowers, and you don't know who they are.
If it's a top ten loan, you can dig and find out. Most people don't. For non-top-ten loans you're in luck if the info is even available.