After three years of waiting, we now have our Risk Retention Rule. All six of the Agencies responsible for the Rule – the FDIC, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Department of Housing and Urban Development, the Federal Housing Finance Agency and the SEC – have finally managed to agree, albeit with significant dissent at the FDIC and the SEC, on a Final Rule. Note that Richard Cordray of the Congregation for the Doctrine of the Faith (in Progressive Causes) …er…the Consumer Financial Protection Bureau, apparently had a heavy finger on the scales, which is why there was material dissent at the FDIC and SEC. So, after all those years of waiting, we have “it.” “It” of course is another five hundred some odd pages of commentary and bloviating and a relatively few pages of actual Rule which, as we study it more, will inevitably have left much that will need to be subsequently clarified. We have already found technical inconsistencies between the commentary and the Rule.
Continue Reading Risk Retention and Stockholm Syndrome
Federal Reserve
Fed Issues Additional Guidance on Extended Conformance Period – Be Careful What You Ask For
By Sean Solis on
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
Federal Reserve Extends Volcker CLO Compliance Period
By Sean Solis on
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
U.S. Banking Agencies Issue Final Rule on Capital Requirements to Address Market Risk
By Crunched Credit on
Several U.S. banking agencies recently approved a joint final rule, set to go into effect on January 1, 2013, regarding the amount of capital required under risk-based capital rules for banking organizations to cover market risk. The new rule aims to revise banking organizations’ internal modeling practices to better analyze and calculate their exposure to…
GSEs: The Night of the Living Dead
By Rick Jones on
I am on a Halloween kick right now – it’s the elections. I hear Zombies are popular this year. Zombies indeed. Do you ever think this could be a deeply sophisticated and sly commentary on our GSEs? How droll. They are scary. How about that for a segue.
The private securitization market for residential mortgages is still dead (like Generalissimo Franco) and the GSEs, attached to a fire hose of taxpayer money, continue to fuel 90% of the United States housing market. But they are insolvent. What apparently worked so brilliantly for twenty-five years is breathtakingly broken. Call me silly, but I don’t think we’ve got a sustainable model here. The good news is that no one else seems to think we have a sustainable model either. There was a symposium at the Federal Reserve last week on the future of housing finance. I don’t think a lot of progress was made. I was passingly concerned to see that almost all of the talking heads were academics. That demographic may be really good at some things; my guess is not so much at rebirthing a functional housing finance market. It struck me as more can kicking. When in doubt, talk. Wonk-filled symposiums give birth to papers, not markets.Continue Reading GSEs: The Night of the Living Dead
American Bankers Association: Regulatory Reform Initiative
By Crunched Credit on
Today the American Bankers Association will publish its Summary and Analysis of the Regulatory Reform Conference Report. The project will provide detailed summaries of each title of the Dodd-Frank Wall Street Reform and Consumer Protection Act conference report, as well as analysis of which entities will be affected and how. The conference report has…
Securitization Survives Round One
By Rick Jones on
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
More From FASB
By Rick Jones on
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.