What is securitization for laypeople

8 The business with securitized German mortgages Derivatives can be tricky or beneficial. After the terrible experience with derivatives in the form of securitized mortgages in America (see Chapter 3), the bank decided to get out there. This business is going well again. The real estate crisis in the USA is over. Banks and government real estate financiers (Fannie Mae and Freddie Mac) have learned from the crisis. Securitisations pass risks on to market participants who are looking for risk and return. Securitization gives financing banks scope for new business. American investment banks are making good money again from the production and brokering of securitisations. Not so with Deutsche Bank. To do this, it operates a very similar business in its home market of Germany. It is a business that is important to have flexibility and chance of profit. It is a business that the bank tries to keep secret nonetheless. When it comes to the topic, not even the familiar mumbled transparency is practiced. The bank mumbles, without any transparency. Complex banking, which is difficult to understand for laypeople and which seems somehow strange, is difficult to explain. Especially when you have said goodbye to public discourse for years and left the field to excited consumer journalists. Such transactions are very difficult to explain if the bank rejects the basis (loose monetary policy of the ECB) in principle, but benefits from it in practice. And when a bank with this special business practice does what it has always loudly denied: to take money from the state. The principle House financing runs on a long-term basis, preferably over thirty years. German construction financing is a wonderfully safe thing that brings calculable income and therefore has only a low risk. However, the bank must reserve a considerable part of its equity to secure these loans. Deutsche Bank 8 Business with securitized German mortgages 8 Business with securitized German mortgages 8 Business with securitized German mortgages104 cannot do any other business for decades with a loan of 130 billion euros. Sure, but boring. Smart bankers have come up with an idea: How about if the bank continues to manage the loans, but sells them to someone else in the background? The customers would continue to pay their interest and repayments to the bank and would not notice anything. An investor looking for safe, long-term investments for his money would get exactly that. The bank keeps a little of the interest for the administrative expenses and pays the investor the remaining incoming payments. The bank receives the purchase price for its loan package from the investor immediately. With this money she can happily start new business. Thought and done! So Deutsche Bank is looking for an investor. According to his very personal needs, she tinkered a package of loans. The amount is determined, the average term, the quality of the debtor, the average amount of interest and repayment. Anyone with a loan book as large as Deutsche Bank can put together the right one for practically every need. Such packages do not have to be put together for regular investors. The bank can also pack parcels of its own accord and then sell some of them to private customers - for example, by mixing in investment funds from the group subsidiary DWS. This has the additional benefit that, in addition to all sorts of very good mortgages, problem children can also be scattered - old mortgage portfolios from Italy and Spain, for example. Mortgage customers are not threatened by such securitization. First of all, a sale does not change anything in the loan agreement and its terms. Customers regularly do not notice that they have been sold. Because the practical handling of the loan almost always remains with the original banks. And it doesn't matter whether the debtor owes her installments to Bank X or Company Y in the end. She has to pay either way. On the bank side, it works like this: The package with the selected mortgages is sold to a company that was founded for this purpose only - a so-called special purpose vehicle. This special purpose vehicle sells shares in the package in manageable sizes. The parcel is, as it is called in the jargon, "securitized". The share certificates give you a letter and a seal, so to speak, that you own so and so many percent of the package and that you can expect this and that interest for it. These are securities derived from the original mortgage financing, derivatives. The author found the first German mortgage securitizations at Deutsche Bank in 1998. At that time, mortgages worth 700 million euros were sold through a special purpose vehicle based on the less regulated Channel Island of Jersey. That ran under the harmless title "House 1998 1". 8 Business with securitized German mortgages 105 In the years that followed, the volume and number of securitisations rose steadily. The company name has also become more imaginative - on closer inspection you get the impression: the more solid the securitized loan, the more honest the name. And vice versa. German loans mixed with Spanish and Italian loans were sold as “smart”. »Construction financing with higher risk« securitized under the name »TopImmo«. In 2008, the international banking crisis emerged from a crisis in American mortgage securitization. Nobody wanted to buy securitized mortgages anymore, regardless of whether they were financing American junk property or German townhouses of stable value. "Markets for [...] securitisations almost came to a standstill and presented a number of institutions with practically insoluble refinancing challenges," says the 2008 annual financial statements. "The upheavals in the financial markets also led to significant value adjustments at Deutsche Bank AG for assets in the trading divisions, in particular from activities with securitized housing loans. «The ECB was concerned that European banks could no longer finance themselves through securitization. The loans were like lead on the bank balance sheets. As a result, banks no longer had any leeway for fresh financing from hopeful companies. However, their investments would have been necessary to put the ailing economic life back on the march. To get the market going, the ECB started buying self-securitized loans in 2008. That later became a real program, and since 2014 has been part of the huge government and corporate bond purchase program that the ECB is using to pump fresh, cheap money into the economy. The demand from the ECB resulted in eager production among banks. "Everything that wasn't nailed down was securitized," reports an insider. A state bank helps In the securitization crisis, the fact that the German state bank KfW founded the True Sale Initiative (TSI) in 2003 proved extremely beneficial. True Sale is a paraphrase for securitized loan sales. The True Sale Initiative was a cartel made up of the federally owned KfW and private capitalist banks to promote their financing needs. Today the cartel operates as True Sale International GmbH. The Federal Finance Minister and the Federal Economics Minister, finance politicians of the Bundestag, representatives of the economy and the state governments sit on the Administrative Council of KfW. The KfW TSI made sure that securitisations became easier in Berlin: A new register was created (cover pool register), which solved the problem of actually having to change the financier in the land register when the loan is sold. 8 The business with securitized German mortgages106 Finally, wholesome rules were worked out to give priority to special purpose vehicles in terms of taxes and to contain the risk of bankruptcy. In 2004 KfW established three foundations: the Capital Market Law Foundation for Germany as a financial location, the Capital Market Research Foundation for the German financial market and the Corporate Finance and Capital Markets Foundation for Germany as a financial location. These foundations receive special-purpose vehicles from True Sale International GmbH through which securitizations are carried out. Because the special purpose vehicles are now owned by three foundation organizations that cannot go bankrupt, they are practically insolvent themselves. This is crucial for liability and tax issues. These advantages are achieved through the most creative application of the law. Legal rules are used that were not created for this application in order to circumvent other protective rights. Because foundation law is actually not about using tax-subsidized foundations to make commercial business easier. Rather, it serves to guarantee foundation capital in the long term and to spend the interest on noble purposes. The three letterbox foundations of KfW are only endowed with a measly foundation capital of 1.3 million euros each. Each does good for around 40,000 euros a year. At the same time, they do commercial deals worth several billion euros every year, the profits of which benefit banks. The foundations are officially located at the German Foundation Center in Berlin. Neither the foundation center nor the public KfW provide information on the transactions. Statutes and rules of procedure are also kept secret. Upon request, a member of the board of directors can inform you that the foundation statutes stipulate that a board of directors of the foundations "may not have any influence or information about the operative business [...]". The special purpose vehicles are controlled exclusively by the TSI. The foundation structure consists of mailbox addresses that conceal the sole influence of the TSI on the special purpose vehicles and thus the securitization business. The whole thing is designed by the state bank KfW to enable private banks to do better business. The ECB is the mainstay of the European Central Bank's expansive monetary policy is a billion dollar purchase program for government and corporate bonds. This includes the special program "Asset Backed Securities Purchase Program" (ABSPP), in English: purchase program for securitized values. At its peak, the ECB bought securities worth almost 600 million euros month after month from European special-purpose vehicles that securitize loans to European private individuals. 8 The securitized German mortgage business 107 The ECB does not want to buy more than 70 percent of a single securitization campaign. The rest can of course be used elsewhere: as collateral for ECB loans. As a result, this means that special-purpose vehicles and the banks behind them can tailor their securitisations precisely to the ECB and get rid of them there completely. At the end of September 2017, the ECB owned securitisations worth EUR 24 billion. It is the largest buyer on the market, especially with good German securitisations. Whoever controls a market can exert influence. The ECB does this in every detail. She has clearly told banks how to tailor their securitisations in order for them to be bought. The ECB has thus given the European securitization market new quality and comparability standards. That's nice for the market. But it is also good for the ECB because it has to keep a handle on what it is buying together. How did the ECB do the market? It demands that two rating agencies rate the securitisations with at least »BBB«. That's not a great grade. It may be a hurdle for Spanish, Portuguese, and Italian letters of credit; hardly for loans from the German real estate market. The weak rating, however, gives German banks the opportunity to mix in bad loans and get rid of them in this way - which, of course, comes at the expense of the price. In 2011, the management of the ECB decided to support and use a database for securitisations. There shouldn't be any general goods in the safe that after months you don't know exactly when, where and how? The biggest consumer on the market wants to be able to find out what's going on at the push of a button. Remarkably, it was not the ECB that set up the desired database. In 2012, European Datawarehouse GmbH was founded in Frankfurt am Main. The shareholders are rating companies, European banks and the German KfW / Banken Kartell TSI. The European Data Warehouse is the only authorized location where the sample forms for the ECB's securitization business can be stored. It is a private company that performs public tasks. Each month, special purpose entities have to fill out 110 fields in the database questionnaire. It works exclusively for market participants and behind closed doors. In the European data warehouse, the German state and private banks' securitization cartel is involved in a European securitization cartel headed by the European Central Bank. The securitization buyer ECB works directly with the sellers and arranges the securities to be offered to them. This ensures that if any one of the securities - or even an entire group - should become lazy, neither the banks nor their purpose will be liable. The state and the ECB have finally prompted from A to Z what has to be done, when and how. There is a second connection between the ECB and the German securitization cartel. Christine Graeff sits on the board of the cartel organization “Foundation for Corporate Financing and Capital Markets for Germany as a Financial Location”. She is Director General of the ECB and, as Head of Communications, one of President Mario Draghi's closest collaborators. Christine Graeff has been a member of the board of the eight-year-old foundation since July 2012. She only started working at the ECB six months later, which is why the ECB writes: "Therefore, it cannot have been sent by the ECB." Certainly, her upcoming move was published in October 2012 and a couple of weeks are probably about the negotiated a new job. Ms. Graeff was unknown in the financial world until she was an official at the ECB; she worked as a communications consultant. Neither KfW nor TSI GmbH gives an answer to the question of the criteria according to which possible foundation boards were approached. The ECB finds nothing in the fact that a top civil servant is involved in the foundation. A foundation that is part of the organization that makes securities in order to then sell them to the ECB. "The voluntary work has been reported to the bank's compliance department and has been authorized," a press spokeswoman said on request. At the beginning of the purchase program, the ECB did not have enough management capacity to accommodate its millions as planned in a market that was still unstructured. So she hired four banks, including Deutsche Bank, to handle the liquidation. After a year, the contract was not extended. The formulations of the ECB suggest that the thought of conflicts of interest came up. Deutsche Bank was never responsible for purchases in the German securitization market. But it will hardly have been possible to avoid the fact that valuable information came together. It takes a considerable portion of naivety to hire a corporation that sells itself to process purchases. Today six national central banks are running the ECB program, including the Bundesbank. Separation of institutions, functions and tasks is standard in modern social work. In this way, conflicts of interest are channeled and clear, transparent procedures are made possible. The opposite can be seen wherever there is corruption: unclear separation of tasks, personal dependencies, nepotism, slow, non-transparent procedures. It may be due to the deeply anchored authority culture of the European Central Bank that there is no sense of conflict of interests, boundaries and a transparent structure there. Because the ECB is also responsible for completely contradicting things in its core tasks. On the one hand, 8 The business with securitized German mortgages 109, as a central bank, is good for the money supply and the key interest rates. This has fundamental consequences for the entire financial system. With her bond purchases she also has a direct impact on the financial sector. On the other hand, the ECB is responsible for the supervision of the banks. It examines and assesses an industry whose essential business it has a decisive influence on. The ECB always declares that banking supervision and central banking are strictly separated. But there is no longer any separation at the top of the authorities. Everything comes together where the decisions are made. It is obvious that an authority with such major design flaws cannot develop a feeling that one must not mix different interests. Deutsche Bank's securitisations After the ECB got into the business of buying securitisations, it became increasingly clear which rules the friendly major customer in Frankfurt am Main appreciates. The securitization people at Deutsche Bank were the first to get down to business. Gone were the days when special purpose entities had been founded under marketing-driven companies (Smart, TopImmo). The special purpose vehicles were now called "Rhön", "Zugspitze", "Spessart" and "Bodensee".Apparently, hiking enthusiasts had stuck in the securitization compartment. In the year John Cryan took up the position, the securitization people hit a big blow. On behalf of Deutsche Bank, TSI founds the special purpose vehicle "Wendelstein 2015 1 UG". It is noteworthy that Wendelstein is not even granted the legal form of a regular GmbH. The bank chooses the special form of the »small GmbH«, known as the »entrepreneurial company«. This is actually intended so that kiosk operators who cannot get the minimum equity of a GmbH together (25,000 euros) can still set up a limited liability company. Wendelstein is endowed with 5,100 euros. This mini-company is immediately given to the three cartel foundations and receives mortgage loans from German private customers worth 20 billion euros from Deutsche Bank for the purpose of securitization. In view of the total volume of private German real estate financing in the group of 130 billion euros, the Wendelstein deal is a considerable chunk. All rules of the ECB are complied with: The special purpose vehicle is no longer located offshore, but in Frankfurt am Main. Although it does not belong to Deutsche Bank at all, Wendelstein is consolidated in the consolidated balance sheet. This makes it clear that the bank has a controlling influence. A bank spokesman finds the beautiful phrase that Wendelstein is "related to the ECB". 8 The business with securitized German mortgages110 When asked about this, the then CFO Schenck went back to explain that the securitization business in the USA had shrunk sharply. "We are no longer active in trading in loans securitized by the state real estate financiers in the USA." Not only do you load credit risks on bank balance sheets, you pass them on to houses that have other sources of funding. Insurance companies are a big buyer. That's actually a good capital allocation. ”When asked, Christian Sewing, Board Member for Private Customers:“ We have to make it very clear that we are no longer doing the securitisations that led to the high penalty in the USA. At the same time, we explain to customers which securitisations we are still using. Take securitisations of your own building finance in Germany. We carried out the full credit check ourselves, which we kept in our own books for a long time. We then sell some of the securitisations to other investors. This creates space on the balance sheet for new loans. If you discuss this with the customer, then they will understand too. «If you discuss it with the customer ... There is mumbling again. The information only comes when the board members are asked about it in an interview. On its own, the bank does nothing to explain the sale of large parts of the German private customer business. You have to search hard to find the 20 billion in the 2016 annual report (page 462, column 3, line 11). And then you have to know what's behind it. Not only the securitisations as such are bypassed. The bank is also audibly embarrassed about the fact that Wendelstein “is related to the ECB”. There is nothing to be seen far and wide of »houses that have other sources of finance«, even »insurance companies« (Schenck) and »other investors« (Sewing). Officially, the bank is critical of the ECB's purchase program. The economics department of the bank writes in a study that the policies of the ECB would senselessly drive up prices for securities. This has resulted in worrying overvaluations in the German residential property market. John Cryan was outraged at both Frankfurt Finance Week 2016 and 2017 about the ECB's purchase program. Deutsche Bank, which has always been particularly proud of not having used state aid after the banking crisis, is happy to accept covert state aid. Brokered by the TSI cartel of the state bank KfW and the private sector, the Deutsche Bank is financed by the state ECB.