Indeed, a notable pattern of financialised capital accumulation involves systematised flexibility aimed at widening spaces to attract investors, and the reproduction of capital through product substitution, or the use of a variety of calculative means to ease immediate risks to increase capital. According to Zywiciki and Adamson (2008:81), this other means ―include increased origination or application fees, greater down-payment requirement, stricter foreclosure rules, and prepayment penalties.‖ But in terms of accumulation through securitisation, there is, however, in more specific terms, a mathematical approach that expands the possibilities of ‗bad‘ risks to be quantified as assets. Hence, through a conscious grading and packaging of risk characteristics and the development of marketing strategies, it was possible for lenders to ‗turn bad risks into assets‘33
. But how does systemic tranching emerge? Put simply, it involves the increased use of information communication technology (ICT) to create large and complex structured securities or portfolios of MBSs-ABSs. With ICT, different kinds of portfolios are speedily created, pooled, calibrated and sold in special purchase vehicle (SPVs) structures.
The SPVs help in facilitating the creation of tranches of securities, standardised according to the weight of risk it carries. As a result of calibrating risks in tranches of MBS, sponsors and mortgage originators are able to accumulate through the recycling of risk at minimal ease and cost. By way of identification there are three kinds of tranches. First, is the lower risk tranches, otherwise called senior tranches,
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which attract a high yield rating between ‗AA‘ to ‗AAA‘. Second, is the middle risk tranches which attract a rating between ‗Alt A‘ to ‗BBB‘, while the least, poor and higher risk tranches have little or no rating. It is often referred to as the equity class tranches. Though equity class tranches attract lower returns in the security market, they are made up of mostly mortgage loans with greater down-payments and early repayment options. On the other hand, the overriding implication of equity class tranches is that it is an avenue for the originators to generate an immediate flow of cash (Bethel et al 2008:10). It is arguable that most of the subprime mortgage loans fall within the equity class tranches where originators pay less regard to the characteristics of borrowers except the borrower‘s capability to provide down payment or accept higher interest rates. This specifically informed some conjectural assessment of the causes of the crisis to be as a result of the correlation effect of the increased repayment failures witnessed in the equity class tranche (Cowan and Cowan 2008).
Overall, according to McCoy and Renuart (2008:30) the manifold tranching of subprime RMBSs makes it difficult for issuers to keep track of the certainty of risks and performance of their loan origination. Presented with this difficulty, loan originators become more of contract servicers that engage merely in the process of Pooling and Serving Agreements (PSAs) or layers of new PSAs for fee and commission. This process led to what economists described as ‗tight coupling‘, a situation whereby risks overlap with each other to make ―it impossible for both loan originators and investors to measure and weigh the quality of all the MBSs, CDOs ABS-CDOs products‖ (Schwarcz 2007:19). Hence, in this frictional format, investment and accumulation is argued to be underpinned on the expanded ambience for managers to originate and securitise ‗Lemon Loans‘ or riskier and less profitable
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loans (Ashcraft and Schuermann 2008). Perhaps the choice of securitising ‗Lemon Loans‘ is ridden with risky variables, especially when the motivation to engage in mass accumulation is based on the optimisms of price stability, liquidity flow, mass lending and consumer spending. One of the key variables as noted by Franke and Krahnen (2005) is that increased use of tranching technologies amplify the complex characterisation of repayment risk, default risks and the rush by originators, investors and other intermediary financial operators to engage in fragile and combustive patterns of accumulation (Nesvetailova 2007).
An increase in tranching has also been noted to affect the volume of liquidity risk. According to ESF Resource Guide (1999:14), liquidity risk occurs as a result of the ―relative ease with which a particular ABS can be traded and sold...at a price that is reasonably approximate to its intrinsic value...the greater this risk spread, the greater the liquidity risk‖. As will be shown in the subsequent sub-section, the concerted effort to increase capital accumulation through balance sheet transactions (by both the mainstream and the subprime issuers) increased the overall loss in value of the asset originally secured. According to ESF Resource Guide (1999:13), one of the consequences of depreciation in the value of MBS-ABS is that they trigger the risk of early amortisation caused by a number of related factors, which include:
‗insufficient payments by the underlying borrowers; insufficient excess spread; a rise in the default rate on the underlying loans above a specified level; a drop in available credit; enhancements below a specified level; and bankruptcy on the part of the sponsor or servicer‘.
In this regard, Dell‘Ariccia et al (2008:9-10) argued that the drive for capital accumulation led lenders to ―cut standards‖ and ―trade loan quality for market share.‖ Emphasising further, French and Leyshon (2004:280-4), in their analysis of reintermediation, argue that all modes of reintermediation or tranching aim to expand
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the spaces for the dispersal and collapsing of risk but without prudence ( see also Wray 2007:22, Kaufman 2007, Kregal 2008, Davidson 2008, Schwarcz 2008, Engle and McCoy 2007). The issue of prudence formed part of the report of George Bush‘s, President Working Group (PWG) and, according to the PWG report, increased slicing and dicing of risk brought about ―erosion of discipline‖ amongst credit originators who had to make the choice between responsibilities of risk avoidance and to take risk as an opportunity for capital accumulation. Instead, according to Dell‘Ariccia, Igan and Laevan (2008:18), the choice of these responsibilities was bestowed on the competence of disintermediation, continued house price appreciation and on the hope that defaulting borrowers will ―always liquidate the collateral and repay‖ their loan. This development is noted to be the frenzied drive that led to the deepening of highly risky loan transactions with people and places ―where delinquency and default and pre-foreclosure are already common‖ (Newman and Wyly 2004:78).
Overall, it will be emphasised that it was the operational complexities and the structure of securitisation which allowed for liquidity creation and management outside non-traditional instruments or outside traditional regulatory supervisions. The development produced a chain of overconfidence and speculation that eventually brought about the multiplication of risks (Greenlaw et al 2008, Honohan 2008:2). Thus it can be summed up that increased tranching or amplification of financialised accumulation on the one hand increased availability of credit for a greater number of people, but on the other hand, it was its structural contradictions and tension that brought about passive responsibilities to risk. This was precisely the situation that prevailed within both subprime and mainstream lending, whereby lenders withdrew from applying entrepreneurial discretion to profile the risks they
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were taking as any kind of risk can be off-loaded via SPVs. In this scenario, both the capital or the security market and the economy became overridden with debts without collateral to offset them. The lack of, or insignificant, collateral diminished the incentive of borrowers to keep-up their repayment obligations. This especially happened when lenders‘ or originators‘ obligation to monitor loan performance (LP) was diminished or extinguished as their MBSs-ABSs balance sheet cleared in the security market. Hence, as earlier noted, the aggressive approach of accumulation or leveraging by complex network financial instruments, expanded the margins of commitment to the life-time of the credit relationship between the lender and borrower (Rajan and Winton 1995).