Rick Jones

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FASB wants to expand Fair Value to other financial assets.  That bears repeating:  FASB has published an Exposure Draft that would extend the dubious joys of fair value accounting to ALL financial assets.  I so wish I was making this up.  On May 26, 2010, FASB published this missive. Fair Value seems to hold a religious (that’s born again, not Presbyterian) fascination for the academic accounting community, which seems astonishingly indifferent to the horrifying role the viciously pro-cyclical fair value process played in the late “Great Recession.”  Isn’t the definition of insanity doing something a second time and expecting a different outcome?  What are we doing here?

The proposed new rules would require all financial assets, with very few exceptions, to be subject to a mark to market  requirement.  Banks and other financial institutions would be obliged to mark all loans whether held for sale (which makes some sense) or held to maturity.  For loans, the mark would hit Other Consolidated Income (OCI) and put equity on the Fair Value roller coaster.

Continue Reading More From FASB

Do you have any idea how often each of the House and Senate reform bills proposes to solve an intractably complex problem by simply asking the regulators to come up with rules?  I don’t, but I found at least 20.  Now it all goes to reconciliation, and my suspicion is that that number will not go down and may, indeed, go up when our duly elected representatives throw up their hands, declare victory and make someone else figure it out.  Now, Congress asking our regulators to create rules to implement policy is nothing new, and there’s nothing wrong with it, if used sparingly.  But this is wholesale delegation of hugely important stuff.

Without clarity around the rules of the game, business will not thrive.  I keep coming back to this notion.  I run a business, and I need to figure out how financial markets will function coming out of the late unpleasantness.  It’s hard enough, but when the rules keep changing, it’s worse.Continue Reading Congress Kicks the Can Down the Road

We’ve been promised that the House and Senate financial reform bills will be reconciled in a highly transparent and thoughtful way and be wrapped up and ready for the President’s signature by Independence Day.

I’m trying to be upbeat about this.  There are, after all, substantial benefits to be obtained from certainty, and once this is done, we’ll at least have rules.  We may not like them, but at least we’ll have rules. (OK, the final Bill will probably include dozens of referrals to the regulatory community to make the actual rules, but nothing’s perfect.).  God only knows what to expect when our duly elected representatives, awash in populist outrage and with the clock ticking loudly down to election day, try their hands at making sense of these two ridiculously complicated 1,400 page bills.  Barney Frank will manage the reconciliation process.  Imagine, he has now been imbued with the hopes of the financial services community for a sensical and balanced Bill.  Man bites dog.  You can’t make this stuff up. Continue Reading Reconciliation Time on the Hill: Be Very Afraid

I write from CREFC’s annual do with my 800 or so best friends.  We are trying to party like it’s not 2009, and you know, we’re getting there.  The government’s still playing pin the tail on the regulatory donkey, Europe’s a mess, housing and employment are not ready for prime time, and the banking system hangover goes on.  Yet…JPM got a deal done, the bonds cleared, and pricing was… well, it’s been reported that they made a few bucks.

The CREFC convention kick off is the Monday night parties, of which yours truly was a host of the annual Dechert dinner.  Note I said parties with an “s”.  We’ve had a banker party drought these past few years. I see the return of the Street parties as a leading indicator of CMBS 2.0.  We cannot wish 2.0 into existence, but let’s face it:  A robust appetite for anything to invest in with yield measured in percentage points not basis points plus good vibes can a market revive.
 Continue Reading Partying Like it’s not 2009

There’s a headline to grab attention. It’s been reported that several Chinese and other non-domestic and non-traditional lenders are rushing across the American landscape looking for deals. Take a look at the WSJ article of June 2 about the International & Commercial Bank of China’s recent loan to GE. ICBC has over a trillion dollars of assets, it’s reported to be the most profitable bank in the world and it’s ready to lend. Maybe this is just a “no duh” moment, but what a terrific business strategy for any lender not damaged by the late unpleasantness (a Southern expression still in use about the Civil War but appropriate here)! If the gnomes of Basal get their way and require US and European banks to put up massive capital over the next couple of years, strong, unimpaired semi-sovereign banks may be the best ticket in town.Continue Reading Chinese Banks Lend in the U.S.

I can’t stand it. We now have skin in the game provisions proposed by the SEC, the FDIC, the House of Representatives and the United States Senate. 

On CNN the other day, Congressman Barney Frank said that the most important part of the House Financial Reform bill was skin in the game in securitization. Okay, I know we’re probably stuck with it and the world will not end. Capital formation will be modestly depressed and the geniuses on the Street will work overtime to mitigate the impact of all that excess capital sloshing around. But it pains me to give up the fight. Skin in the game is certainly an attractive slogan and, superficially, it makes a great deal of sense. But no one has really looked at the data.  The worst performing sector in the fixed income world was, without doubt, loans to developers, builders and the like. All of this lending activity was on book or, in the skin in the game parlance; the lenders had nothing but skin in the game.

Hello! Lehman failed. Bear failed. Merrill failed (more or less). The GSEs don’t even bear thinking about.   All of this carnage happened not because the institutions were brilliantly successful in laying off bad credit to dumb investors, but because they had skin in the game. In the CMBS sector, mortgage loan originators generally sold 100% of the risk of the loans they originated, and the sector is experiencing losses generally consistent or somewhat better than the performance of commercial real estate taken as a whole. Again, explain to me how skin in the game is going to fix this?Continue Reading Skin in the Game

CMBS 2.0 is coming, we hope (and pray). But boy, it’s taking its good time about it. Putting aside what our friends in Washington may or may not do to the structure of securitization, it’s remarkable to me how shy we in the industry (and its trade organizations) seem to be about putting a stake in the ground as to what CMBS 2.0 should look like. 

With CMBS 1.0, we built the airplane while flying it, so it’s hardly shocking that when tested, some things failed the stress test. On the other hand, we also did a great deal of fundamental work on an industry-wide basis in the early days, to make CMBS work. We created the IRP, the data dictionary and the like. Shouldn’t we do at least that much again?

Now that we’ve had a chance to observe the problems of CMBS 1.0 in the crucible of a wrenching recession, we seem mildly disinclined to take any dramatic action to address structural problems on an industry wide basis.Continue Reading CMBS 2.0

Note to File:

If you thought about it, when we take something as complicated as a pooling and servicing agreement and then modify it to do a work around changes to GAAP, it’s not going to be pretty. And it’s not. Welcome to the fair value auction. In a CMBS securitization, when a loan defaults, you’d figure the servicer would either work it out, foreclose it or sell it. That’s what we did until 2001 when the accountants concluded that, if the servicer had the ability to try to sell a mortgage loan, the trust would no longer be a qualified special purpose entity or a Q, and the securitization not a true sale. If it’s not a true sale, the mortgages stay on the issuer’s balance sheet and the transaction simply fails to work.Continue Reading Note to File re: Fair Value Auction

I’m just about to do another CRE Finance Council (formerly CMSA) PSA after work tutorial. A couple of observations. As a lawyer who packed the sausage casings, it is startling to see how much uncertainty and, in fact, misinformation exists about how a PSA actually works in the community of people who buy and sell bonds and other financial assets. Perhaps not surprising, because who reads these things, except the lawyers who draft them and a few anal B piece buyers, who really need a life? Continue Reading Time to Read that PSA

As if we didn’t have enough trouble already, we’re now caught in the political cross-fire between Sheila Bair at the FDIC and the rest of the regulatory apparatchnik of the capital markets. We all commented last week on the FDIC’s Advanced Notice of Proposed Rulemaking (“ANPR”) on the new safe harbor for bank securitization. It seems little more about turf than mission, the FDIC proposed to lard its safe harbor with a number of substantive restrictions on what a securitization transaction would look like, including “skin in the game”, limits on the number of tranches of securitized debt, seasoning requirements on the underlying financial assets and compensation restrictions for the people in the bank responsible for the securitization.Continue Reading Why is Sheila Bair Making Rules on the Safe Harbor for Bank Securitization?