Last week the FDIC approved its final Safe Harbor Rule regarding securitization. That something that sounds so good could be so bad leaves you thinking: can’t we catch a break in trying to repair this damaged economy? To set the stage a bit, the FDIC has a suite of powers, while acting as conservator or receiver of an insured depository institution (“IDI”), to affirm or repudiate contracts and claim or recover property of the IDI. When a failing IDI securitizes financial assets, these powers allow the FDIC to undo the transaction and re-acquire those assets. The possibility that a securitization would be undone by the FDIC is an existential problem for any proposed securitization. But never fear. So long as a transaction meets all the conditions for sale accounting under GAAP, the transaction is proof against the exercise of those powers. Even better, there is a Safe Harbor! Sounds simple, right?

But now, while both political and policy waters remain roiled by the recession and credit crisis, the FDIC has chosen to recast its Safe Harbor and impose a host of additional restrictions on access to the Safe Harbor. The new Safe Harbor Rule not only purports to protect securitizations from being unwound even if the transaction does not qualify for GAAP sale accounting, but in addition, and this is very important, it also limits access to the Safe Harbor even for transactions which DO qualify for sale accounting. The FDIC does say a transaction that fails to meet the Safe Harbor conditions, but nonetheless is a GAAP sale is not subject to repudiation and seizure, yet the regulatory missive seems to suggest that any prudent party better hustle its regulated rump into the Safe Harbor. In what seems, to me, a beautiful expression of Brave New World speak, the FDIC says, in describing its rule, “The FDIC recognizes that, as a practical matter, the scope of the comfort that is provided by the rule is more limited than that provided in the Securitization Rule. However, the FDIC believes that the requirements are necessary to support sustainable securitizations.” Come again?

These additional conditions on the Safe Harbor are a grab bag of policy and populist nostrums that have been current among the chattering class for the past year or so. First, we’ve got a simplistic 5% risk retention. (And banks can’t hedge it. Seems a weird provision to be imposed by a regulator charged with the safety and soundness of the banking community.) Second, it incorporates the SEC’s new proposed Reg AB and offering reform rules (at a minimum). Finally, for RMBS, which lives in a separate circle of Hell, specific additional provisions have been included, which limit the number of tranches of securities that can be issued, require additional disclosure (including disclosure of compensation of various parties to the transaction), enhance representations and warranties and the like.

What is troublesome here is the assertion that an additional agency will be making dual track ad hoc decisions on issues which are more centrally the purview of other agencies.

Is it enough that the disclosure meets the SEC’s disclosure requirements, or might the FDIC have a different view of compliance? I noticed in the preamble that the FDIC does suggest that it reserves the right to require added disclosure. Maybe the FDIC will want something else, something different? That’s efficient, right?

What in the world is the FDIC doing regulating the tranching structure of securities? Don’t we have the SEC for that?

Finally, what’s the FDIC doing out in front on risk retention when Dodd-Frank specifically directed all applicable Federal agencies to engage in joint rulemaking (which, by the way, started last week and, badly I hear), leading to a one year transition period for RMBS and 2 years for CMBS. Oh, I know the FDIC rule contains an auto conform provision but the preface to the rule suggests the FDIC reserves its right to further regulate if the joint rule making does not fully meet its needs. One is left with the inescapable sense that this Safe Harbor is more about regulatory turf than good policy.

This Safe Harbor will not achieve the goal of making the world safe for securitization. It will make securitizations more difficult, more complex and more costly.

Oh well, as a lawyer perhaps I shouldn’t complain. But I can’t help be concerned that, once again, we’re losing track of the notion that before we can whack up a pie, we have to bake a pie. In order to refine securitization to better serve policy goals, we first have to have securitization. This is not helpful. This creates a duplicate regulatory regime and, with the prospect of many regulatory constituencies fighting over the rules of the game, fires of uncertainty will be stoked. We need rules and we need certainty. This really is not hard. Can’t we just get it done?


By Rick Jones.