NewOak Managing Director: Transparency is Vital to Secondary Market Revival

Chad Burchance became managing director at NewOak Capital in April 2010. He has 19 years of experience in financial services in roles spanning risk management, fixed-income trading and middle office. Prior to joining NewOak, Chad was the head of risk and analytics for State Street Corporation and its hedge fund administration unit, International Fund Services, since 2001. Chad also worked at several other leading firms including Lehman Brothers, Citigroup and UBS. For this edition of In This Corner, Burchance sits down to talk about securitization’s role leading up to the credit crisis and what needs to change for a comeback. Leading up to the foreclosure crisis, what was the main risk oversight analysts missed on the securitized products? There was no single cause that led to the global financial crisis. Nor was there a single issue that one can pinpoint on the side of analysts. The issues were a myriad of an overabundance of credit and leverage, a lack of regulatory oversight, and an over-reliance on financial models? rather than common sense and due diligence. The underwriting standards were just inadequate. There was also an overaggressive appetite for risk, not to mention a concentration of that risk. There were just too many assets ?with too few players. Were these securitized products just too complex to understand? Complexity was certainly issue, but more importantly, there was an over-reliance on historical assumptions of default rates that played significantly into many of the miscalculations. This certainly leads to the overall inadequacy of investment in risk management infrastructure that proliferated around the industry from both buyers and sellers of risk. You need strong tools and expertise to properly analyze increasing complexity of the securities and the collateral. In addition, there is a greater understanding of the need to perform testing around both base case and pessimistic scenarios to support structured products. Some suggest the secondary side should look to develop simpler products. Do you agree? Certainly there is an aversion to complexity as demonstrated by the syndication market. Overall, there is certainly a great movement toward transparency — transparency of the structure, the collateral and its economic behavior under certain conditions. It’s one thing for a structure to be transparent and complex. It’s another for it to be opaque and complex. With the government removing its support of the housing market, are you seeing any interest returning from investors? There is interest around the housing market in many forms. As the overall economic climate in the US improves, we are seeing interest from buyers across the board from investors looking to buy bulk assets to whole loan portfolios from banks. The potential yields are very appealing for those capable of quantifying the inherent risk well.