Pending Sub-Prime Lawsuit Questions Securitization’s “Debt” Classification for ERISA Purposes

A new OnPoint from Dechert’s Employee Benefits and Executive Compensation team discusses a recent ruling from a federal court in the Southern District of New York. There, a pension plan that had acquired notes issued by a vehicle invested in a pool of sub-prime residential mortgage-backed securities is arguing that the vehicle’s assets are “plan assets” that are subject to ERISA. Essentially, the plan’s argument is that the notes should be considered equity for ERISA purposes under ERISA’s so-called 25% test, notwithstanding that the notes were the subject of a “will” level legal opinion that the notes are debt for tax purposes. The plan further asserts, among other things, that the vehicle’s servicers are therefore ERISA fiduciaries with potential ERISA liability. On March 15, the court, although expressing skepticism regarding the plan’s claim, allowed the litigation to proceed to the discovery stage. We will be keeping an eye on this case, and please come back to Crunched Credit if and as the case develops. For more information on this topic or other ERISA matters, contact Andrew L. Oringer or Steven W. Rabitz.

Commercial Real Estate and Climate Change

God help me, I’m finally writing about climate change.  This commentary assiduously avoids the obviously political (we take the view that complaining about and belittling our elected representatives and the permanent bureaucracy for doing boneheaded things is entirely apolitical).  And while even the phrase “climate change” carries with it a certain frisson of a capital “P” political debate, this is not that.  So, please, don’t ball this missive up, toss it away and cancel your subscription to Crunched Credit if you’re (A) not a fully-enrolled initiate in the Green Revolution, or indeed, even, if you are someone who thinks that the threat of climate change is somewhat… overblown (I’m not even going to think about using the term “climate denier”) or (B) someone who thinks climate change is real but simply throws your arms up in frustration over the possibility of finding a possibly affordable fix.

In either of those cases, I expect your default response to climate change talk is simply to move on to something more actionable in your professional life and I’m going to suggest here why you shouldn’t do that.  We need to start paying more attention than I have paid to date.

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Dechert OnPoint: Japanese Risk Retention: JFSA Favors Diligence Over Disruption

On March 15, the day the Japanese Financial Services Agency (the “JFSA”) published its final risk retention rules, Dechert’s CLO team published an OnPoint discussing the new final Japanese risk retention rules and their impact on the CLO market. 

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LIBOR, Again (Sorry!)

We are all going to be heartedly sick of discussing LIBOR and LIBOR transition long before it becomes a thing at the end of 2021, but we really need to get this done. I can’t make this at all funny. We have a problem…but not a solution. Fixing it is going to be a heavy lift. Like a colonoscopy, demonstrably necessary, but in no way fun. (Actually, I really should say, that my doctor is a lovely person, but one simply can’t make wonderful really matter when discussing all things proctologic.)

Okay, we are indeed doing stuff. I appreciate and certainly don’t want to diminish the efforts of our trade organizations, major banking institutions or the Alternate Reference Rate Committee of the Fed (ARRC), but I fear we are not doing enough and not doing it quickly enough. Even as one who got a merit badge during an undistinguished boy scout career for procrastination (I never got around to picking it up), I know that to elide this from the immediate to do list, hoping someone rides in on a white horse to make all this better, is really a bad idea.

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SFIG Vegas 2019

As we return to our desks after last week’s whirlwind in Las Vegas for the Structured Finance Industry Group (SFIG) Conference, we find ourselves reflecting on how this conference was at once business as usual while also showing evidence of an evolving industry looking to the future. Approximately 8,050 attendees, including a sizable Dechert team, gathered last week at the Aria to discuss past, present and future and to put our heads together to ask “where do we go from here?” Continue Reading

Sticks and Stones May Break My Bones, But Words Really Matter

After an evening checking out my various high school and college yearbooks for any troublesome content, and checking Mom’s photo albums (I’m good on the yearbooks, but there were a couple cowboy and Indian pics from when I was about 7, that could be troublesome), it got me thinking hard about the power of words, images and narratives. Words will hurt you. Images will hurt you. Narratives will hurt you.

Our industry has to pay attention to the power of words, images and narratives; and particularly right now as the 2020 election cycle gets into high gear.

High school tweets, Texas bar admission applications, and college papers apparently can now ruin careers. Now some may say that’s a good thing and some may say it’s terrible, but let’s face it, it is a thing. In this world of hyper-connectivity, words and images take flight instantaneously and can spread around the market, around a polity, a community or around the globe in a heartbeat. And they never go away. Moreover, there seems to be a view in currency that forgiveness is not possible and balance is no longer relevant and that people are defined by their worst. A sort of the lowest common denominator. Well, heaven forbid that I take sides here, but think, if you will, for a moment on Winston Churchill: Gallipoli, Edward VIII, resistance to Indian independence and certainly some racism towards the people of the Indian subcontinent, but still the savior of the West. Bad outcome? Could happen today? Continue Reading

Opportunity Zones: Monetary Musical Chairs, Anyone?

The new Opportunity Zones program that came to us in 2017’s major tax reform offers investors the chance to roll the capital gains from the sale of any appreciated property into new investments, located within specially designated areas known as Opportunity Zones, and defer—and potentially partially eliminate— capital gains taxes on such sale. The program is similar to a 1031 Exchange, but with a socially conscious geographic focus, that applies broadly to investments across asset classes – not just to real estate. The tax benefits of the program will begin stepping down for investments made after December 31, 2019, so the clock is ticking on the chance to pull capital out of appreciated assets and invest it in a Qualified Opportunity Fund (QOF). The time is now to start thinking about where all this capital will be sitting when the music stops.

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More Fun With Risk Retention: Europe and Japan Weigh In

We’re all just back from CREFC and the mood was broadly constructive.  (Don’t you love that word, “constructive”?  When did “constructive” become a fancy way to say “good”?)  We all went to South Beach this year wondering where the investors were, wondering whether the market was okay and wondering whether December was a blip or a coda. If the industry chatter captured the gestalt, and the gestalt is right, then while this recently strong market will surely expire at some point, this is not that point.

Amongst the frolicking in Goldilocks Land in SoBe, there were some actual issues discussed.  One of these that got some attention, at least by the wonkier members of the crowd, is the new risk retention rules out of Europe.

We’ve written about these before.  It is very much a moving target.  If you think the American rulemaking process is baroque, turgid and opaque, spend some time in Brussels.  Continue Reading

It’s 2019 – Take Courage!

It’s 2019. Nothing really terrible or shocking has happened yet…at least by the standards of December. But it’s early yet. As a card-carrying member of the commentariat, I could not possibly pass up the opportunity to bloviate on the “Year Ahead” with the certain knowledge that no one will remember if I’m wrong, and if I’m right, I’ve got bragging rights! The temptation of course is to go full Nostradamus and say things like, “The path of the market will continue to repudiate and embrace the past and the Fed shall, at last, flom the gabberwobber!” Being Nostradamus is never having to say you’re sorry.

In the spirit of CrunchedCredit, which purports to be firmly rooted in the real world of capital formation, commercial real estate and markets, we feel more than a skosh of pressure to try to be a tad more prescriptive and to stick to things that might be useful for those trying to do stuff. However, seriousness of purpose and a bit of thoughtfulness should not be confused with any real likelihood of being right.

With all that said, here’s what CrunchedCredit thinks about 2019:

  • Hunkered Down Investors. The investor class largely hung it up late in Q4 this past year and we are all nervously awaiting their return. Like that pesky groundhog in Pennsylvania, they’ve got to show up! I am committed to a strategy of hope that the investors will return in early 2019 and embrace risk. We should know pretty soon after this is published whether those shy and anxious investors will poke their noses out of their dens. If not, it could be a rough year. If they do come out, don’t dismiss the possibility that they scurry back into their dens at the first whiff of powder.
  • US Domestic Politics. The cage wrestling in the swamp magnified by our sad headline machine will continue to cause gyrations in, at least, equity markets which seem particularly flighty. Is the problem spooked individual investors or are the equity markets now slaved to the dues ex machina of AI programs with algorithms tied to social media, Twitter feed and the news cycle written by a tattooed millennial with the social skills of a three-day dead carp and zero understanding or interest in the real economy or economic fundamentals? Saul of Tarsus may have found God on the way to Damascus two thousand years ago, so anything is possible I guess, but it’s hard to conceive of anything coming out of the US domestic political scene that would improve the economic environment or investor confidence. If we’re going to have a good year, we’ll all just have to ignore the noise.
  • Ditto Geopolitical Events. Brexit might not be awful but it certainly is not going to be good. Western Europe continues to get weirder and weirder as the tide of political small “l” liberalism continues to recede. As we have observed in this commentary before, absent some remarkable political rapprochement amongst the major players, the question is not whether the European Union survives in its current form, but when it fails. The Euro is, eventually, toast. While Western Europe is always the hands down winner of the Kick-the-Can-Down-the-Road Award, there will be a bridge too far someday soon and the center will not hold. We trust that it is not this year. Revanchist China and Russia are just plain bad news. The ambitions of Russia and China on the world stage during periods of their rapid economic growth may not have been great, but those two bad boys on the world stage in a period of economic financial distress at home is even more frightening.
  • Regulatory Burden. The regulatory burden here in the states is somewhat abated from the “if it moves (or certainly makes a profit), regulate it” heyday of the Obama administration. Moreover, our friends at Basel seem to be quiet at the moment and regulatory initiatives such as the Fundamental Review of the Trading Book and other capital raising regulatory regimes seem to be on a pause for at least as long as the European economic machine continues to stutter. Here at home, the incurred loss methodology of recognizing credit losses might have another day in the sun as the quietly criticized and broadly loathed CECL model (thank you, FASB) looks like it may also be on pause for a while longer. Capping it off, we may get good news on HVCRE, Volcker, etc.
  • Heads I Win, Tails You Lose. There’s a real chance that either interest rates begin to retrace their upward path downward because the economy sucks, or both the short and long end of the curve start to move upward without a concomitant refreshing of economic growth because of inflation and stagnant productivity. In both cases, the economy will contract and the cost or availability of debt will begin to stress businesses in the real economy and imperil capital formation in the commercial real estate space. Have faith in the Fed?
  • The Fed Behaving Badly? Speaking of the Fed, we’re fascinated with the Fed these days. It’s not like we haven’t had a Fed for ages. Nor is it that the Fed didn’t have the same tools in the toolbox, nor the same dual mandate to both protect the value of our currency and insure full employment for decades. What’s different? The media has turned the Fed into a rock star (presumably, however, without the fun of booze, drugs, roadies and wild parties). It’s the shiny thing that we can’t bear to look away from. That fascination keeps moving markets and creates volatility. This would maybe make sense if the Fed were rightly and widely known for its infallibility. However, if they have a secret Rosetta Stone which supports perfect, predictive forecasts, it’s about time they pull it out and start using it, isn’t it? So, it’s likely the Fed will over or undershoot as the Fed attempts a soft landing here. And that’s okay, it happens all the time. A quiet “Oops” is muttered and we adjust. If you’re rooting around for something special to worry about (it’s different this time), it’s the Fed’s balance sheet and its current “autopilot” reductions. If increasing the Fed balance sheet from $1 trillion to $4+ trillion during the Great Recession gets credit for stabilizing the economy and militating against a more significant economic crisis, then shouldn’t we think that shrinking the balance sheet might have a significant economic impact as well? Who knew? We’re in the “Here Be Dragons” part of the economic treasure map and I’ll guess we’ll find out.
  • Entropy. All systems degrade, whether that’s the sun lit uplands of the 2010-18 expansion here in the US, or simply the larger arc of the end of history fantasy born in the late 1990s. Things that work break; systems degrade. It’s been good for a long time. Moreover, as the world gets more complex, interconnected and technologically dependent, it seems to us less rugged and more susceptible to the knock-on consequences of bad things happening. Our economy is a brilliant construct delivering high octane economic performance, but fundamentally pretty fragile. Stone cairns survive from the time of the ancients while beautiful glass vessels shatter. Don’t we feel a little glass vessel-ish to you?

So taking all that on board, I want to announce that It’s Going To Be Okay. It’s fine. And you thought this was going to be another one of those morose, zombie apocalypse type of things that I periodically pen. Nope, not this time.

I mean it’s easy to wring ones’ hands and there’s always something riveting about a train wreck (as long as you’re not on the train…are we?), and all those bad things could happen and could upset Goldilocks. But, take a deep breath, folks. There’s still good news out there. GDP growth has been strong. The real economy has so far shaken off the noise of the stock market. Even the fiddling stock market has roared back this past two weeks. There’s been a number of business-friendly changes in tax and regulatory policy over the past couple of years, and certainly there’s a more business-friendly environment inside the federal judiciary. Trade policy? Well, it could end up okay…right? The banks are stronger. (I hesitate to use the phrase “fortress balance sheet” only because the Europeans do so without any sense of irony.) We’ve got a relatively amiable interest rate environment and significant consumer confidence without overwhelming consumer debt. The corporate debt situation is benign and while government debt is going through the roof, no one seems to care…at least for now. What’s the likelihood of exogenous shocks? None of the geopolitical players, either at home or abroad, presumably are actually intent on blowing up the world. Let’s face it, we’re all pretty good at kicking the can down the road. So while big ticket macro and geopolitical risks abound, odds are that really bad things won’t happen and the economy will continue to grow, albeit at somewhat more muted levels for 2019 and perhaps more years after that.

Let’s talk recession. Here’s the shocking headline: We’re going to have a recession at some time. Put on the big boy and big girl pants and face up to that. There’s nothing wrong with a recession. After 10 years of this expansion, we’ve lost perspective. A recession is not the end of the world. They happen periodically. Always have. Always will. And from the burning embers of every recession a new expansion is born. Like the old adage about generals fighting the last war, when we think recessions these days, we see the Great Recession of 2007-2009, which would indeed suck. But, do we really think that’s the template of the next downturn? Seems to me the next one will be more like the preceding four or five relatively short, intense V-shaped recessions that have characterized the American economy since World War II. It’s just not the end of the world. (Trust me, if you’re a banker and have never seen a recession, and maybe that’s most of you these days, it’s really not all that bad.) If it doesn’t happen in 2019, it’s going to happen in 2020, 2021 or 2022. It’s going to happen. When it occurs, it’ll present everyone in the business community with challenges, but challenges that we have regularly met in the past and will meet this time as well.

So here’s to a good 2019. It might be the last year of this expansion, but maybe not. Someday soon we’ll have to deal with a recession. Not today. Investors are coming out of their Q4 dens, capital formation will continue, the economy will continue to grow, commercial real estate will continue to function reasonably well and the Bad News Bears will tut-tut while continuing to invest and we’ll all have a bloody good time. Enjoy it. It will end, but not yet. So there.



Ignoring Macro…Or Are We as Smart as a Horse?

My, my, what a couple of weeks.  People, don’t you understand that I’m trying to run a business here?  Is a recession on the doorstep or is that a 2022 thing?  Are things really bad, or really good?  How am I supposed to stay dispassionate and analytic when the stock market gyrates and the drumbeat of portentous news never stops?  The worst December in the market since the Depression says The Financial Times!  It’s very annoying and I feel very much put upon.

All of this has got me thinking, are we ignoring Macro?  Are we not seeing what’s actually in front of us?  Not seeing the Big Stuff?  There is surely enough disturbing things out there to get and hold our attention.  The stock market continues to oscillate widely, the 10-year Treasury Rate is now well below 3%, volume is up and every time another headline crosses the ticker, everything changes again.  Is our trade dispute with China existential?  Is Prime Minister May in or out – happy or sad?  Is Boris Johnson having a good hair day?  The Italians are leaping around and gesticulating broadly, outraged now about how France may be getting a pass on budget discipline.  If France starts to cheat (again), can the center hold?  Japan is building an aircraft carrier…think about it.  In China, some young general suggested it might be a good idea to shoot at an American warship in international waters.  There’s a great idea.  The Donald continues to tweet and we almost had a smack down in the oval office between the President, Nancy Pelosi and Chuck Schumer just last week.  Continue Reading