So far the ECB's attempts to stimulate the Eurozone economy with relentless jawboning have been a failure as absent the GDP boost from "drugs and prostitution", Europe would be in a triple-dip recession by now. Furthermore, while its recent foray into covered bond purchases is commendable, the lack of freely floating assets available for purchase has meant that the central bank has been limited in buying up to a paltry €3 billion in covered bonds weekly as we learned most recently yesterday:
And while the world debates if the ECB will finally unleash government bond QE, or not over the resistance of the Bundesbank and in direct contravention with the ECB's mandate to not engage in government monetary financing (in Draghi's own words), there remains one last wildcard: the previously announced purchases of ABS securities. The problem here, however, is that even the ECB itself is not sure what it can and can not monetize, having changed its eligibility criteriea at least twice already as reported in "The ECB Changes Its Mind Which Bonds It Will Monetize, Then It Changes It Again." That and the now generic issue plaguing Europe: an insufficient amount of securities available to buy to make much of a dent in the ECB's planned €1 trillion balance sheet expansion.
And yet one bank is already set to benefit from the ABS program no matter what its actual outcome and impact on the European economy: the same bank that spawned none other than ECB's head... Mario Draghi. According to Bloomberg, Goldman Sachs Group says it’s adding staff to its European asset-backed securities business as the bank prepares for a resurgence in the $305 billion market that shrank more than 40 percent over the past four years.
New securities will be generated as hedge funds and private equity firms seek to repackage debt as they enter the direct lending market, according to Simone Verri, who is co-head of financial institutions group financing at Goldman in London. Investors buying bad loans from the region’s banks will also want to securitize the assets, he said.
Why? Because the ECB is there as a backstop and will buy the worst of the worst as it rushes to become Europe's bad bank, pardon bad hedge fund.
“We have invested a lot in this opportunity by hiring more people, especially for ABS structuring,” said Verri, a partner at the New York-based investment bank. “The specialty finance players and quasi-banking sector could use ABS to fund loan origination and that’s a very attractive commercial opportunity in the medium term.”
“Buyers of loan portfolios need financing and they can get that either from an investment bank or eventually via selling ABS backed by these loans,” said Verri. “This could be an important development as non-performing loan disposals will improve banks’ balance sheets and risk capital.”
And just so there is no confusion, the ECB's ABS purchase program may be good for Goldman; others? Not so much.
While the program signals the ABS market has been rehabilitated after being blamed for worsening the financial crisis, its impact on bank lending will be limited, said Verri. “Many European banks are capital constrained, so I don’t see the ECB’s ABS purchase program necessarily as a game changer,” said Verri. “It doesn’t address capital needs and therefore it doesn’t necessarily unlock credit origination.”
In other words, the stated purpose of the ECB's buying of ABS, "unlocking credit origination" will not succeed. It will however succeed in making Goldman richer as it branches out to cover yet another riskless market.