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Long ago and far away, a radio show gave birth to the catchphrase “Who know what evil lurks in the hearts and minds of men?  The Shadow knows.”  I think, although I’m not entirely certain at this point, that the Shadow was a good guy, but deeply misunderstood and viewed with enormous suspicion by more main stream enforcers of right thinking and morality.  Shadows are where bad things happen, where the bad guy hides and jumps out when the teenage starlet inevitably walks into the darkened derelict house, saying in a little voice, “Hello, hello?  Billy, are you there?”  Bad things inevitably ensue.  Shadows are bad.

Okay, what’s this all about?  We need to stop the narrative right now that all financial market participants; funds, specialty finance companies, advisors, BDCs, etc., which are not insured depository institutions (let’s call them non-banks for short) are creatures of the shadows.  Shadows are bad, non-banks are in the shadows…ok, you get the picture.  Our traditional banks, which take deposits guaranteed by the US of A are under the loving and protective wing of the FDIC, the Federal Reserve or the Office of the Comptroller of the Currency (and yes dear Lord, the FSOC).  That makes sense, they take Caesar’s coin and Caesar is entitled to a bit of supervision.  But the non-banks do not; they risk private capital.  That makes a difference.
Continue Reading The Shadow: What’s in a Name – The Maleficence of Shadow Banking

A few steps forward and a giant leap back.  This familiar phrase might be the perfect summary of the CLO market’s Volcker Rule roller coaster since December 2013.  A few weeks ago we wrote about the Federal Reserve Board’s (the “Fed”) less than satisfying “fix” to address what the market has perceived as one of the Volcker Rule’s unintended consequences.  The Fed, in what had seemed to be an honest (although insufficient) attempt to prevent the need for banks to divest of holdings in CLO 1.0 transactions, agreed to provide two 1-year Volcker Rule conformance extension periods.  As extended, the conformance periods will expire in mid-2017.
Continue Reading Fed Issues Additional Guidance on Extended Conformance Period – Be Careful What You Ask For

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 EU Banks –Dog Bites Man, Again

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.
Continue Reading Federal Reserve Extends Volcker CLO Compliance Period

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.Continue Reading Time for Regulatory Reset

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 SEC Reopens Comments Period for Reg AB II

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.
Continue Reading CLOs under the Volcker Rule: New Exemptions, New Issues, New Obligations – Part II

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.
Continue Reading CLOs under the Volcker Rule: New Exemptions, New Issues, New Obligations – Part I

It’s the Christmas season and this week we got the Volcker Rule. How seasonably appropriate! Now, I get the whole Christmas trade. You’re good, you get toys; bad, coal in the stocking. But this is bad in a regifted, four-year-old fruit cake sort of way. My desk now groans under the 1100 pages of Volcker whilst I’m trying to gin up some Christmas cheer – it’s not fair. We at Dechert will be sending out a more thoughtful analysis of the Rule by way of Dechert OnPoints, with more to come as the digesting process continues.Continue Reading Santa-baby: Volcker in the Sack