Dr. Constantin Gurdgiev:

I would not be as negative on securitisation as Mr. Brown but I agree with him that heavy concentration in the market on any particular instrument, be it a complex instrument or a plain vanilla equity deal, is not a good idea. The markets function best when they are diversified and when different instruments are available.

In theory, securitisation is not a bad thing. It is about packaging and pricing risk together and offloading that risk from the balance sheet of the institution to private investors so that the institution can free some of the resources to lend again. When it is abused it is a bad thing, as it is when it is mispriced. The key issue is the same as with the question of how to stop the excesses of bank lending. We should look at placing the risk of mispricing risky assets in the hands of those who are paid to price those risks. So, if a bank issues a securitised package and the package is mispriced, as might be evidenced by a mismatch in the ratings it is given and the quality of the underlying security and assets, the bank in question should be responsible for it. It should be the same as if a car salesman sold a car which was supposed to be a certain year and a certain make but was not. As long as we do not rescue or underwrite financial intermediaries, and provided we make sure they purchase their insurance in the open markets themselves, we will do away with a large part of the problem.

The second tier of protection is to have very robust enforcement of regulations, something that we have not seen in Ireland or elsewhere but which has contributed to the mispricing of risks in the markets. Is securitisation evil? No. Can securitisation be used as an instrument for mispricing risk? Most certainly, but so can cars or apples or oranges.