/22/08/02

I will attempt to address the subject of "securitization " -" Tassnid" in Arabic, in three separate parts. I will explain ,in the first part ,and in simple language what the government is trying to sell to its potential victim: The small investor. In the second part
I will briefly review the technical aspects associated with this investment instrument , in the third part I will address the impediments of securitization in Lebanon .

Part I Since few months, Hariri's government has been floating in the local press the idea of "securitization" Tassnid . Forced into a corner by its mismanagement and plundering of the national finances
Hariri's government suddenly realized that the national debt accumulated during a decade since it took office was approaching thirty billion dollars (according to the latest Bankers' association statistics ,the 30 billion$ dollar figure has already been surpassed) . Hariri and his financial whiz kids also realized that
interest payments on the global debt is eating away over 90% of the Government's revenues . What hurts us most is to realize that not even one tenth of this debt can be substantiated with infrastructure or other projects which were meant to create jobs for our young and able population . Lebanon's capital has always been the vigo , creativity and intellectual ability of its people. Billions of dollars were squandered and plundered by a political class who used their positions for self enrichment and sold their conscience and souls to Syrian interests who amassed hundreds of millions of dollars along with their proxies in the Lebanese suretr rale and the judicial corps.They profiteered for years , they still have their hand in the country's vital resources: Port,Airport, public works projects, tourist facilities such as the Casino du Liban, private businesses, you name it, they have a royalty fee in everything .

Having exhausted its borrowing capacity the government started to explore and invent new ways and techniques in order to survive and hustle more dollars from the population. The latest buzz word we keep hearing in the local media and local press is "Securitization".

Put simply,it boils down to selling a future expected cashflow generated by an asset and cashing the proceeds right now. This is precisely what our government is trying to sell to the Lebanese small investor ; what they mean is:

- we are broke

we have no more cash we cannot even borrow because nobody trusts lending us money anymore so, we have to sell whatever we can we will sell the cell-phone license with its facilities,the fixed phone license with its facilities,the port ,the airport,the electricity production and distribution facilities,the water utility , the tobacco authority (Rgie des tabacs ), the wheat Silos warehousing facility , sorry , we are so strapped for cash that we have to even sell the future cash-flow from any other source through "securitizing" it and stuffing the "securities" to you guys. don't worry we will organize a market for the IOU paper you will be buying so that if you need cash you can also convert the piece of paper we are stuffing you with and you can get back your cash minus a 10% spread loss ( This is if you get back your cash!!!) meanwhile if the Lebanese pound loses 200 ,300 or 500% of its value against the dollar , tough luck guys , the loss will be your baby .
or , if for a reason or another the "originator" of the paper you are buying goes belly up and no more cash flow is generated then you can keep the paper you bought as a souvenir . Or even better , you can
frame it next to the picture of the "TROIKA". did you think that's all ? Well no,You will also be required to pay more and more taxes because the government will be having less and less revenues . Well , in Lebanon once you are elected to the legislative assembly as a deputy you get a salary for life , the same goes for a minister ,somebody has to pay : It's you , the poor guy who has to foot the final bill.

Part II

Securitization started in the US in mid seventies .Mortgage related loans were packaged and converted into small denominated tradable "securities" known as mortgage-backed securities. The market developed subsequently to include other asset classes of loans such as general purpose syndicated loans ,special purpose corporate loans,other receivables from the future sale of commodities e.g: oil , or services e.g: telephone receivables. Asset securitization is the process by which a stream of future cashflow is sold today by its owner or "Originator" through a special purpose vehicle (SPV) incorporated offshore .The SPV's sole purpose is to issue the debt instrument in the form of an IOU paper tradable on a local or international secondary market.In the case of international forward contracts ,the future customer or "obligor" will be legally bound to settle the price of the goods directly into an offshore "Trustee" account . The Trustee will be making payments of coupon interest and principal upon maturity of the "security".The investor has a certain degree of protection because the SPV has no other creditors and therefore cannot go bankrupt . The risk of bankruptcy remains as far as the "Originator" is concerned. In the case of the famous Brady bonds this risk was mitigated by constituting a reserve fund of US treasury zero coupons bonds that served as collateral and thus increased investors' confidence in the bonds . The term "Bankruptcy remoteness" is usually used to describe the credit enhancement of the "Originators' credit standing with one or more features of extra protection for the investor .

The most successful "securitization" transaction todate has been the Brady Bonds. In the eighties most of the Latin American countries were experiencing severe financial stress and their huge loan exposures to international banks and financial institutions had started to cause a destabilizing effect on the worldwide financial markets. The US treasury secretary Nicholas Brady ,in association with the IMF and the World Bank worked on restructuring the outstanding sovereign loans and interest arrears into liquid debt instruments which came to be known as Brady bonds. These were a mixture of fixed and floating rate instruments with scattered maturities ranging between 10 to 30years.The creditor banks could exchange the sovereign loans to those countries into the Brady bonds whose principal and interest payments were collateralized by US zero coupons bonds and other marketable securities. The debtor governments had their debt and interest payments reduced . The banks were happy to recover their bad debts , The debtor countries were happy to be
bailed out and the financial world averted a domino effect of bank failures and financial disaster. The countries involved in the Brady Plan restructuring were : Argentina,Brazil,Costa Rica,Dominican Republic,Ecuador,Mexico and Uruguay . Nigeria,Morocco,Philippines and Poland were also involved in the Plan.

Securitization backed by financial assets is commonplace nowadays: . credit-card receivables , autoloans , equipment leases , etc..It is worth mentioning though that the creditworthiness in more than 90% of
the outstanding securitized instruments is at the AAA level . The remaining 10% has a AA- credit rating. In fact this is mainly due to credit enhancement of the "Originator"s loans by the "Trustee" who repackages the loans into interest bearing securities and enhances their credit rating by extra forms of investors' protection. In most of the cases a secondary market more or less liquid exists for this type of securities.

Part III

Judging by what Hariri's financial wizards have been writing in the local press ref: Nasser Saidi's"Tassnid" article in Annahar of 19th of Aug 2002 ,it looks like the Government is upping the ante since some time and is preparing us for what will be coming our way once they are finished with selling out the assets of the Lebanese State through "Privatization" . Their next project will be the sale for "ready cash" of the future income to be generated by the Lebanese customs excise taxes on imported cigarettes and other goods, the future income from whatever share that would accrue to the state after privatizing 39 public utilities , and who knows what else. To add insult to injury Hariri's government ,again through its financial wizards ( F.Siniora, the finance minister,Riad Salameh,the Central Bank Governor and the Vice governor N.Saidi) is trying to make us believe that securitization will help in transforming Beirut into a regional capital market. They are forgetting that the basic foundations of a capital market are local and regional security, a systemic and reliable regulatory environment, juridical transparency and protection of local and international investments .

Lebanon is politically,militarily , juridically and economically under occupation . Lebanon is an Arab country occupied by an Arab neighbor who has been imposing on our country ,directly or indirectly, and since three decades belligerence against another southern neighbor. It is ludicrous to talk about Beirut becoming a
regional capital market when Lebanon's sovereignty , independence , free political decision making , juridical legislative and regulatory authority has been highjacked by a neighbor who disregards the basic
respect for human rights in its own country and who has been placed since 1978 on the US terrorist list ,and still is .

The Lebanese and foreign investor should be better informed about this sad situation of our country before risking his hard earned cash in phony projects promoted by a government appointed by the occupier and serving his interests and the interest of its proxies.