Iosco chief blasts staff report for exaggerating US securitization risk

6 October 2014. By Neil Roland.

An International Organization of Securities Commissions report that shows a surge in complex securitizations has split the regulatory group, with Chairman Greg Medcraft saying the report is inaccurate and vastly overstates the potential risk.

Medcraft told MLex that Iosco’s research report, published last week, exaggerates the extent to which the risky structured-debt products have returned since the financial crisis.

Medcraft’s challenge to the report’s accuracy was given independent support by the Dealogic private research firm that was the source of the data.

However, no correction is planned, an Iosco spokeswoman said Monday. The Iosco research department stands by its report, she said, though it is checking further into the figures.

Iosco’s “Securities Markets Risk Outlook 2014-2015” said that the complex securitization products that contributed to the meltdown have surged eight-fold in popularity in the last few years, mostly in the United States.

These shadow-banking instruments are securitized products that are themselves securitized — repackaged pools of asset-backed securities that become new products.

Iosco consists of securities regulators across the globe, including the US Securities and Exchange Commission.

Interview leads to clash

Doubts about the report were triggered when an MLex reporter asked Medcraft about the data during an interview on the sidelines of Iosco’s annual conference in Rio de Janeiro last week.

Medcraft, who also heads the Australian Securities and Investment
Commission, reviewed the two charts on securitized securitized products.

“That can’t be correct,” he told MLex. “No one is issuing them.”

He stormed into the office of a senior aide.

“This is a serious issue, a massive mistake,” Medcraft told the aide.

“This is a big problem for us,” he added.

Medcraft said he was reviewing for the first time the securitization figures published on page 68 of the report Wednesday. The 129-page report had been posted on the Iosco website, accompanied by a press release.

Medcraft developed a securitization expertise while on Wall Street. He rose to become Societe Generale’s global head of securitization.

Dealogic faults charts

The Iosco report sourced the statistics to the Dealogic research firm. But a spokesman distanced the London-based firm from the two charts on securitized securitized products.

“I wouldn’t re-use either chart if I were you,” Dealogic spokesman Edward Jones told MLex on Friday.

He said the Iosco chart showing a three-year surge in issuances “looks somewhat inaccurate to me.”

Another chart showing that the vast majority of recent issuances took place in the United States is “not something we are able to track so not sure how they did that one,” Jones’s email said.

In an email on Monday, he added that both charts “refer to securitized ‘securitized’ issuance, which we don’t track.”

Eight-fold rise 

The Iosco report displayed charts showing a projected eight-fold increase, to $86 billion, in securitized securitized issuances since 2011. Among them are products known as collateralized debt obligations squared that were popular during the financial crisis.
The projected 2014 level of $86 billion tops the $52 billion issued in 2007, before their use plummeted, according to a chart in the report.

This reported resurgence is a “particularly concerning development” that is “worthy of continuous monitoring,” the publication said.

About 85 percent of the issuances between 2012 and mid-2014 took place in the United States, according to another Iosco chart.

Research chief stands firm 

Iosco’s research director, Werner Bijkerk, who is responsible for the report, stood his ground Friday when asked about Medcraft’s criticism.

“The data is correct,” he said in an email. “Dealogic is the standard in the market.”

In a follow-up interview on Monday, the research chief said he contacted Dealogic in response to Medcraft’s concerns to try to obtain more detail about the figures.

The firm wouldn’t cooperate, Bijkerk said.

“I have no clue why,” he said. “We’re kind of disappointed with Dealogic.” The research director said he will try to obtain more information about the products from issuers and credit-rating agencies in the weeks ahead.

— with reporting by Anjelica Tan