October 14, 2010
I applaud your proposed amendment to Item 1111 of Reg AB. It will serve 2 purposes.
First, it will provide an additional bit of information for the investor to weigh when deciding on investing in ABS & MBS securities.
Second, it will promote transparency and build confidence into what should be a fairly safe investment vehicle. It may reverse some of the overdone trashing of these securities, all being painted by the same brush.
I knew ABS & MBS securities well. I was shocked and appalled that the entire sector crashed during our current financial crisis. I worked for Capital Markets Assurance Corporation (CapMAC), a monoline insurer and early innovator of these securities. CapMAC was ultimately taken over by MBIA during the Asian financial crises of the late 90s.
I was a clerical worker in the risk management area. I would review all underwriting packages that were created for each deal CapMAC was involved in. CapMAC provided 3rd party insurance against losses in ABS & MBS securities. Taking into account overcollateralization, reinsurance, stringent due diligence and the depression-era scenarios used in the portfolio models, ABS & MBS should have been a rock solid investment. I actually wondered why anybody would choose to buy insurance from CapMAC, AMBAC or MBIA considering the very minimal risk these securities held.
From what I've been told by former co-workers, fraud crept into the collateral around 2006. That could only mean that quantity had taken precedence over quality. CapMAC would, as part of their due diligence, send underwriters to physically see the properties on a random basis.
Had your proposed rule been in effect the entire time, this stringent due diligence may have been the norm and may have set the standard that possibly would have saved the entire sector.
Disclosure: I have not been involved in ABS nor MBS since 1998. My company has no investments in this area or these types of securities.
Chief Compliance Officer
DFS Capital Management, LP
50 Old Kings Highway North
Darien, CT 06820