The Financial Times reported on April 2 that the Eurozone Banks continue to load up on sovereign debt; generally, the debt of their respective host countries. A few days later, the Financial Times reported a bevy of talking heads crowing over the end of the EC financial crisis. And then on April 16, the European Parliament voted to approve a slew of new laws for the EU banking marketplace, including a single resolution mechanism so comprised to be almost useless and a common rulebook for winding down the banks. Does anyone here or there think any of this really matters? First, it’s going to take years to generate the rules that this legislation birthed and even after the Euro apparatchiki spend years creating detailed rules, the dynamics of Brussels will ensure there will be so many loopholes it would make a block of Swiss cheese blush. Moreover, does anyone actually think the various nation states will honor these rules if a champion bank is in trouble? I, for one, do not. Continue Reading
On April 7th the Federal Reserve Board (the “Fed”) announced that it would provide banking entities with two additional one-year extensions to conform their ownership of CLOs covered by the Volcker Rule. The Fed stated that it would act on these extensions in August of 2014 and 2015. The Fed’s action would extend the conformity period from the current deadline of July 2015 to July 2017. The Fed’s approach to remediating the unintended consequences created by the Volcker Rule brings to mind a famous quote by famed publisher Malcolm S. Forbes, that “[i]t’s so much easier to suggest solutions when you don’t know too much about the problem.” While the extension offers some relief for CLO 1.0 (i.e. pre-2008) deals, it fails to alleviate the effects of the Volcker Rule on the CLO market. Considering the overwhelming testimony regarding the potential impacts of the Volcker Rule, one must wonder if the regulators appreciate the Volcker Rule’s material impact on the CLO market.
Following on the heels of last year’s bi-partisan “Housing Finance Reform and Taxpayer Protection Act of 2013”, which was introduced into the Senate by Senators Corker and Warner, a similar bill was recently introduced in the Senate that could result in the wind-down of Fannie Mae and Freddie Mac. Under the bi-partisan “Housing Finance Reform and Taxpayer Protection Act of 2014” (the “Reform Bill”), recently introduced by Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID), Fannie Mae and Freddie Mac would be replaced by a new independent agency, the Federal Mortgage Insurance Corporation (the “FMIC”), within five years. The FMIC would be tasked with operating a Mortgage Insurance Fund to provide a limited, government-backed guarantee on qualifying, privately issued mortgaged-back securitizations.
The Reform Bill would require private investors to retain a 10% first-loss position before any government guaranty would kick in. Additionally, the Reform Bill could have the FMIC establish a securitization platform aimed at standardizing securitization agreements and contractual terms for both covered and non-covered securities.
Other legislation addressing housing finance reform was introduced into the House by House Financial Services Committee Ranking Member Maxine Waters, the “Housing Opportunities Move the Economy Forward Act of 2014”. Like the Senate bill, this bill would replace Fannie Mae and Freddie Mac within five years and create a new independent agency, the Mortgage Securities Coop (the “MSC”), which would operate a similar Mortgage Insurance Fund to provide a limited, government-backed guarantee on qualifying, privately issued mortgaged-back securitizations. Among other differences between the bills, the MSC, and not private investors, would hold the first-loss position required on all mortgage loans with the government guaranty.
For more information on the Housing Finance Reform and Taxpayer Protection Act of 2014, the Housing Opportunities Move the Economy Forward Act of 2014 and the potential impact on the residential mortgage securitization market, check out this Dechert OnPoint by CrunchedCredit’s own Ralph Mazzeo, along with Dechert’s Patrick Dolan, Robert Ledig, Thomas Vartanian and assisted by Meghan Redding.
Earlier this month, I and a few of my colleagues here at Dechert attended CREFC’s 2014 High Yield Distressed Realty Assets Summit. The general sentiment of optimism and exuberance for 2014 felt in Miami was not as palpable at the NY Athletic Club, although this may have been brought on more by the fact that this is a distressed debt conference, rather than anything having to do with the market. Continue Reading
It’s still in the early days of 2014. I think it’s finally stopped snowing in the East, the sun has come out and the stock market is continuing to outperform the woe purveyors. Republicans and Democrats have gotten something done on the budget; lions have laid down with lambs; geopolitically, the world’s a mess but no one seems to care back home. The financial crisis of 2007 and 2008 is beginning to fade into history. Things are pretty good and likely to get better for quite some time.
Isn’t it, therefore, a great time to reset? To reset some of the regulatory and legislative excesses stitched together with little reflection during the crucible of the late, great credit crisis? What appeared to make sense in the middle of that crisis simply doesn’t make a great deal of sense anymore and it’s time for a reset. As John Maynard Keynes famously said, when the facts changed, he changed his mind. Shouldn’t we? It is the height of hubris and willful incuriousness to ignore four years of data and not recalibrate.
If we were to recalibrate, let’s think of some of the things we might rethink.
Almost a month ago, the SEC surprised many people by including a vote on the final Reg AB II rules on its February 5 meeting agenda. In a highly unusual move, the SEC then removed the vote from the meeting agenda on February 3, two days before the vote was to take place. This left many to speculate as to the reason the vote was cancelled and what internal politics were taking place at the SEC. Was the vote not supposed to be on the agenda in the first place? Continue Reading
In between record snowfall and ice storms here in Philadelphia, a number of Dechert attorneys went down to sunny Orlando Florida for the MBA CREF 2014 Conference.
Regulation AB is big. Reg AB governs, among other things, the condition for shelf registration. The SEC is fixing to do something significant to Reg AB; we’re just not sure what. Continue Reading
In our previous post we discussed some of the structural challenges and opportunities facing CLO market participants since the Final Rule was released in December. Today we tackle the age old question, “what is an ownership interest”. The question is important because the tentacles of Volcker’s provisions prohibit banking entities from holding ownership interests in covered funds. We will also briefly summarize a few other restrictions related to CLO transactions brought about by the Final Rule.
Befitting the holiday season the regulators recently decided to bestow upon us all the much anticipated (dreaded?) Volcker Rule. At 1100 pages of truly riveting reading material, Volcker has certainly given all of us plenty to wade through during these recent cold winter weeks and much to the surprise of the structured credit industry there were material provisions sprinkled throughout the 1100 pages that significantly affected the collateralized loan obligation market.