Rick Jones

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If there’s a worry bead left to worry, hold it in reserve for Basel III. Basel III (its informal name – it’s actually a patch job on the never really fully implemented Basel II) is the most recent effort by the Basel Committee on Banking Supervision to fix the worldwide financial system. I am far from a master of the nuances of this enormous regulatory undertaking, but I know enough to be worried. As a friend and colleague said, “if the only right answer on Jeopardy to ‘What is Basel?’ were ‘a delightful walled medieval city,’ we might be better off.”

Basel II was never fully implemented, certainly not in the United States. While Basel II generally resulted in a significant relaxation of capital requirements for most lending activities, (that worked well, right), it stipulated that many types of commercial real estate loans warranted uniquely higher capital changes.  These loans, called High Volatility Commercial Real Estate or HVCRE, include acquisition and development loans, construction loans and loans to sectors deemed by the applicable regulators to have higher risks of default and greater loss expectancy.  As Basel II was never implemented here, these CRE rules never really bit.
 Continue Reading Basel III: Big Deal or Not

Back from vacation … The sheer joy of re-engagement cannot be captured in words.  But, can there be a better way of restarting than perusing FinReg?  Being the parochial structured finance lawyer that I am, I start with Subtitle D with the Potemkin village-like name of  "Improvements to the Asset Backed Securitization Process" and Section 13, which is the Proprietary Trading or so-called Volcker Rule provisions.  I’ve got some thoughts.

Let’s start with the improvements to the securitization process.  The good news, as I’m sure everyone knows by now, is that some sensible asset class-specific provisions for commercial mortgages were included in the risk retention language.  More flexibility in sorting out what alignment of interests ought to look like.  Included was the notion that a B piece buyer could meet the retention requirement as could really good reps or underwriting.

The bad news is, just as in almost every other corner of this massive regulatory exercise in political self-indulgence, all the tough and important issues have been kicked down the road to the “Regulators”.  The scope of that delegation is breathtaking.  The regulators have been invited to sort out what is and what is not risk retention (vertical strip, horizontal strip, L strip), what is the “credit risk” for which 5% must be retained, what are good hedges and bad, what is the minimum hold period for risk, what is high quality underwriting, and what appropriate risk management practices of securitizers ought to be.  Wow!  They can do all that?  We won’t have to think at all.Continue Reading Securitization Survives Round One

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