Rick Jones

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The other week, I was musing in this blog about the likelihood of more AIB and Bank of Ireland type auctions of U.S. Dollar denominated assets by European banks. In the Wall Street Journal, on Friday, September 23rd, the headline was “Banks in France Cut Dollar Loans”. The article focuses on two of France’s biggest banks, BNP Paribas and Société Générale, jettisoning U.S. Dollar denominated assets.

And then, the news about Dexia broke on October 10th. Dexia is a huge French-Belgian bank, though with a lesser profile here in the States than its more famous Parisian and Brussels-based sisters. The French, Belgian and Luxembourgian governments immediately swooped in to guarantee deposits and provide credit support and began chitchatting about a good-bank, bad-bank fix. The reaction in the markets has been curiously muted. Dexia is huge. Its reported balance sheet is more than 500 billion euros. (And, of course, Dexia had been reporting Tier 1 capital of 10% a couple of months ago. How’d that happen? But that’s a different story.)Continue Reading Always Look on the Bright Side of Life: How Dexia’s Failure Could be Good for Capital Formation

My team and I have spent the better part of the past eight weeks dealing with Irish loans and other portfolios of…stuff. While the conduit market was imploding, pipelines were being aggressively repriced and loan production was shifting into a very low gear, there has been a full scale feeding frenzy for portfolios of seasoned loans. While new loan originations were being dragged through the knot hole of torturous and ultimately paralytic analysis, millions of dollars were spent in high speed car chases for billions of dollars of seasoned loans in awkward, brief and brutal auctions.

Cognitive dissonance anyone? These are alternate universes. In the Ordinary Course Loan Origination Universe, every proposal suffers the death of a thousand cuts: “OK, maybe it’s a pretty good loan but I need to really understand what happens if the anchor tenant leaves, the president of the management company gets arrested and an asteroid hits Ohio. What exactly happens in the cash flow?”  In the Alternate "Bid ‘Em Up Universe", crappy reps, document defects and weird deal features? Fine! Win the bid!
 Continue Reading And the Momentum is Going Which Way?

I just can’t schedule enough time in my day to worry about all the things that seem to demand to be worried about. As I write, this week the Dow closed 630+ down one day and bounced 600 points the next. Yikes.  Between that, the debt ceiling and downgrades, Dodd-Frank, the interminable drumbeat of hostility towards Wall Street and business coming out of the White House, the mess in Europe, the falling dollar, insanely low interest rates, high unemployment, the fact that somehow corporate America seems to still be earning bucket loads of money, and, in general the discomfiting disconnect between our still positive every day deal world and the angst, anxiety and drumbeat of awful news in the macro market, what should we think?  It makes my hair hurt.

But, drawing on my deep and boundless reserve of existential anxiety, I’ve now found a few free moments to worry about the SEC’s new re-proposal on shelf eligibility for asset-backed securities. This missive was released (pdf) on July 26, 2011, and comments are due by October 4, 2011. Continue Reading It Just Gets Better and Better: Reg AB Redux

What the hell is going on here? I’ve got a business to run, and it’s really annoying that I can’t sort out whether we’re in the early stages of recovery or on the cusp of another train wreck. When Dad taught me to drive, he had to keep saying “Don’t look at where you are but where you’re going.” Good advice. Yet only as long as I look at the road right in front of me do I feel OK. If my eyes wander to the horizon, I get really itchy.

This recovery feels very brittle. Oh, sure, transactional activity is way up. If Dechert’s practice is the first derivative of the broader capital markets (and I think it is), then things have been getting progressively more robust for the better part of a year now. We’re growing, we’re hiring, deals are coming in at a goodly pace. Yet, everyone I know with the slightest capacity for reflection is touchy, to say the least.

So let’s do a S.W.O.T. analysis of where we sit.Continue Reading What in the Hell is Going on Here Anyway?: A SWOT Analysis of the Financial Recovery

The process of transforming 2,000 pages of Dodd-Frank into 25,000 pages of regulations is well under way. Front and center is Risk Retention. I assume you, like me, have been studying the 300 plus pages of the proposed Risk Retention rules (known to the cognoscenti as the Risk Retention “NPR”) for the past several weeks getting ready for the June 10th deadline for comments, right? Oddly, almost a full month passed before the government actually posted the NPR to the Federal Register, something which is usually done in a matter of days. (Tea leaf readers, thoughts?)

We have visited Risk Retention in this Blog before, but today we want to really focus on premium capture as it seems to capture all that is wrong with the NPR. My first reaction to reading the words on the page: Where the hell did this come from? On the fifth read, same reaction. There was nary a hint of the premium capture monstrosity in either Dodd-Frank or in the whispering about the rule-making process before the NPR came out.  Continue Reading Premium Capture Kerfuffle: The Poster Child of What’s Wrong with Risk Retention

As the CMBS market begins to get its feet underneath it, a number of folks have begun to pine for the public markets. Since 2009, every CMBS deal has been issued as a 144A (or otherwise privately placed). The public market is beginning to feel like a memory. While there seems to have been relatively robust demand for product, a number of bankers say that demand is still somewhat constrained in the 144A institutional market place. They fondly remember the benefits of the public market: liquidity, better pricing, a wider investor pool. As the market rebounds, these bankers suggest that it may be time to dust off the shelves.

And so we thought it would be useful to revisit that bid and ask. For this purpose, we’ll assume that the hypothetical banker is right and that there are significant benefits to be obtained by reanimation of the public deal zombie. That’s the bid.

Here’s the ask. First, there’s that pesky little liability issue. The liability exposure for bankers and sponsors in the 144A market is less than in a public (registered) deal. No liability under Sections 11 and 12 of the Securities Act. That liability is generally pretty absolute (as to non-expertized info) subject only to a diligence defense. Liability in the private market is limited to 10b-5. The need to prove scienter and reliance in a 10b-5 action is a significant burden for an aggrieved investor. The difference in exposure to liability is a distinction not to be sniffed at. Yes, of course we always mean to get the disclosure right. But the underlying assets are complex and there’s an undeniable hunger among the plaintiffs’ bar to “discover” disclosure defects where honest folks, acting in good faith, thought adequate disclosure had been made. (Note also how much more ominous the enhanced liability exposure in public deals will be after FinReg and its progeny become law. As disclosure gets more complex and elaborate, the opportunities to stumble into liability grow exponentially.)Continue Reading So You Really Want To Do A Public Deal?

Well, we now have our proposed risk retention rule. The regulator class has been incubating this egg for the better part of nine months and we’re all now well behind the, admittedly, magical thinking schedule proposed in the actual FinReg legislation. Now, I’m not complaining. Particularly having read this missive, I’m all into delay.

If you want to read the proposed rule, feel free to take your pick of announcements from the Department of Treasury, the Federal Reserve, the FDIC, the SEC or the FHFA: it’s here—the long-awaited Credit Risk Retention proposed Rule (large pdf). The Rule shows every evidence of having been written by a committee, in fact, by a committee of committees. We all know that the definition of a committee is something with more than two legs and less than one brain. A committee of committees? Need I say more?Continue Reading CMBS: The Risk Retention Proposed Rule Has Finally Been Unleashed; The Comments Begin

A few weeks ago, I wrote that it was manifest destiny that the CRE CDO would return to the commercial real estate space.  A lot of people took the time to tell me that I was delusional, at best. I thought I would take a moment to return to the topic and try to establish my bona fides as something other than a knave, a fool, or a foolish knave.

Let’s start with the question of need.  Do we really need this?  Portfolio lenders in need of yield and securitization lenders in need of warehouse capacity are in a day-in, day-out search for leverage. The problem, of course, is that almost all leverage available in the commercial market tends to be short term, creating a durational mismatch against the underlying financial assets.  That situation is bad.  That mismatch killed a lot of players last time.  The CRE CDO addresses this problem with durationally matched financing.  It is also blessedly bereft of the repo mark-to-market.

So that’s the need. It’s real.Continue Reading How I Learned to Live With the CRE CDO. And Love It! (With Apologies to Stanley Kubrick)

Near the epicenter of the late unpleasantness was that wonder of complex engineering, the CRE CDO. It has been blamed for near everything that went wrong or was wrong in the commercial real estate space. It probably is responsible for the winters of 2010 and 2011.

The CRE CDO, as it was initially designed, was an on-balance sheet term financing facility which was designed to be free of the vicissitudes of traditional bank warehousing restrictions and, of course, the dread mark to market of the repo market. The transactions were often dynamic and had substantial term, often up to 7 years. Whole loans (as well as other stuff) which met the elaborate and complex (more on this later) eligibility criteria could be financed on a rolling basis with the proceeds from the disposition of assets reinvested for a substantial portion of the term. CRE CDO paper was customarily rated. The average cost of funds was substantially lower than what could be obtained on a straight bank facility. Continue Reading The Impossible Dream: It’s Time to Bring Back the CRE CDO

2500 of my best friends and I spent three days at the MBA’s annual CREF meeting in San Diego last week. By now, it’s old news, but, indeed, the mood was very upbeat. Just like the days of yore, everyone spent every working moment in lender-mortgage banker meet and greets, exchanging braggadocio over pipelines, products and relationships. People even had the energy to return to old fights and grudges: portfolio lenders vs Wall Street squaring off after sharing a fox hole these past three years. Most heartwarming.Continue Reading Tales From The Conference Circuit: Can I Be Both Giddy and Anxious?