Sector snapshot: Securitization

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What's happening, who's hiring (and firing), and how much are they paying in the world of securitization?

What's the temperature?

On a par with Antarctica before global warming. Concerns about the creditworthiness of bonds securitized on US sub-prime mortgage debt sparked the meltdown in the credit markets, and the angst has spread across all securitized asset classes.

Figures from Dealogic show the volume of securitized bonds issued in Europe halved in the third quarter of 2007 compared to the same period of 2006, with primary issues of asset backed securities stalling since August.

A report issued by JPMorgan last month predicted Europe's banks will lose 550m in securitization-related revenues in the second half of this year. But this is dwarfed by losses related to the business: Merrill Lynch and Citigroup, for example, have racked up multi-billion dollar write-downs, thanks to the difficulty of selling or re-financing securitized debt kept in off balance sheet vehicles.

Who's hiring and who's firing?

Most banks are in negative hiring mode and are busily lopping staff rather than adding them. Morgan Stanley and UBS are understood to have let people go from London commercial and residential mortgage backed securitization teams already.

Other cuts are likely to follow. Bank of America is making 3,000 job layoffs and the Wall Street Journal reports that Brian Moynihan, the new head of investment banking at Bank of America, is conducting a strategic review to establish "how much scale is needed in trading and more exotic structured instruments".

Merrill Lynch, Citigroup, and Lehman Brothers - which employs more than 100 people across its securitization business in London - are all expected to wield the hatchet in the months to come.

"At the moment it is a dead market," says Adam Jama, a structured credit specialist at headhunter Napier Scott.

This isn't, however, to say that career options for securitization specialists are non-existent.

Bank Tokyo Mitsubishi UFJ recently poached Mark Escott, head of securitization at Lloyds TSB, to head its securitization unit. And Wachovia announced last week that it still planned to boost its commercial real estate securitization business (before revealing this week that it plans also to cut i-banking staff by 200).

A headhunter at one structured credit search firm says monoline insurers, ratings agencies and mortgage insurance companies are lapping up staff expelled from banks: "They are trying to capitalize on the recent volatility and hopefully get some very high-calibre professionals for cost-effective prices."

At the same time, he says, there are opportunities for ABS professionals to move into banks' mortgage principal finance teams. Royal Bank of Scotland launched a team earlier this year, and last month Goldman Sachs hired Jeff Stolz, head of securitization at Deutsche Bank, plus his more junior colleagues Paul Weitzkorn and Peter Speicher. The three are expected to ramp up Goldman's efforts at buying non-conforming mortgage assets and mortgage lenders. However, opportunities in this area are relatively limited.

How much are they paying?

Ratings houses pay vice presidents coming out of investment banks salaries comparable to those lavished upon them in banking (i.e. 75k to 95k). But bonuses are much reduced, at 15% to 25% of base. Monolines also pay equable salaries, and their bonuses are more likely to be 80% to 100% of base.

In investment banks, bonuses for VP-level staff have historically been 200% to 250% of base salaries. This year, however, they're likely to be down: one headhunter predicts a 10% to 20% reduction.

"If you're at Goldman [in securitization] you will be paid handsomely. If you're at Bank of America you could be looking at a drop of up to 60%," says another.

What next?

There are signs of warming in the ABS freeze. This week, an off balance sheet vehicle sponsored by an affiliate of US automotive and real estate finance business GMAC issued €700m ($994m) of bonds referencing Dutch residential mortgages. The $80bn Master Liquidity Enhancement Conduit, or M-LEC, proposed by US banks may also go some way to restoring liquidity to structured investment vehicles (SIVs) which invest in securitized assets.

Hans Vrensen, head of European securitization research at Barclays Capital, says a broader recovery in European securitization issuance will depend upon a return of investor confidence, making it difficult to predict: "It's mostly a question of perception. So far performance issues have been mostly limited to the US sub prime sector. The current problems in the European securitization market therefore have not been directly related to the performance of the underlying assets so far, but have been mostly due to liquidity and funding issues among part of the investor base."

Until the market recovers, one analyst says securitization professionals are better off working in institutions with large balance sheets: they are better placed to fund securitized loans without going to the markets.

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