Here it comes

You'll forgive blogger while he goes out to the back shed and destroys a few things. From The Australian today:

The securitisation market will soon get a shot of adrenaline to help small banks win a larger share of the mortgage business.

Eager to spur competition in a banking industry dominated by National Australia Bank, Commonwealth Bank, Westpac and ANZ - now with rates higher than central bank policy - Canberra plans sweeping reforms to open up the mortgage market more widely to smaller lenders, by creating a bigger government-backstop to residential mortgage-backed securities.

Even though few details are set, issuers including Bendigo & Adelaide Bank and ING Groep NV are champing at the bit to offer deals.

“There are at least three transactions waiting in the wings already. The eventual market is going to look different but I think increased volumes will be the end result,” said James Austin, chief financial officer for regional lender FirstMac.

The government says the reforms, due out over the next several weeks, are aimed at giving a boost to the world's fourth-biggest securitisation market. Smaller lenders, who use securitisation as the primary source to fund their operations, need more help from the government to take mortgage-writing market-share back from the big banks.

$%#(&! The brief ray of light that opened up on the possibility of genuine bank reform and substantive lessons from the GFC is now shut off. It's back to securitisation with a bullet with moral hazard to boot. This blogger can see that this is going to be a long couple weeks analysis so tonight it's just going to punch some holes in this report.

First, on what measure is the Australian securitisation market the fourth largest in the world? Look at the chart above. The market has been comatose since the GFC, lent a pulse only by the AOFM purchases. To describe it this way is ludicrous and misleading. For that matter, calling it a market at all is a lie. RMBS are government bonds right now.

This false sense of strength is then taken nuclear later in the article:

Just $15bn worth of deals have been priced this year as big banks dominate the market. While spreads on short-dated AAA-rated tranches have narrowed to 100 basis points over swap, from near 400bp at the height of the global financial crisis, there hasn't been a flood of deals.

Australia's securitisation market has been depressed by changes in the way Standard & Poor's determines ratings for RMBS in Australia and the winding down of the first government program to help small lenders by buying RMBS directly.

But concern that the S&P ratings methodology-change may hold up RMBS deals is likely overblown. Moreover, even though the government has less than $4bn left in a $16bn RMBS purchase program it began in 2008, the new measures in train will likely make up for any drag as the program fades.

So, while Australia is unlikely to return to its 2006 securitisation heyday anytime soon, a spring of deals from smaller banks and even large foreign firms with local operations is coming, with even other types of asset-backed deals likely.

“We see the asset-backed securities market opening up due to the spreads at which they currently trade and the requirement for funding in areas (issuers) have limited access to,” said James Land, head of fixed income for Nomura in Sydney, who adds global investors have targeted securitised products for medical, automobile and credit card debt.

So, we have a picture of spring bounty, ready to flourish with the slightest sprinkling of public dew. Barf.

Securitisation has not diminished because S&P changed its methodology. It disappeared because it caused the global financial crisis. Now, investors understand that shifting and packaging risk is a recipe for disaster, so none of them will buy RMBS unless it carries the stamp of the sovereign.

Which they're about to.