Risk Retention

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Well, it’s been an interesting week and a bit. First Silicon Valley Bank and Signature Bank were closed by their respective State banking authorities with the FDIC stepping in as receiver and then the extraordinary action by the Fed and Treasury to address liquidity concerns and a bunch of rather disingenuous assurances from the great and…

Welcome, dear reader, to our annual Golden Turkey Awards.  But for my commitment to absolute fairness and concern over the appearance of impropriety, I would have awarded the first Golden Turkey Award to Dechert for actually getting the Golden Turkey Awards done this year.  What a crazy year end.  The market is insane.

On the other hand, while time is short, there’s plenty to bloviate about.  I remember last year we were absolutely ready for the end of the Trump administration because the Biden administration promised a “dull is cool” vibe.  Well, dull has been a failure.  The farrago of lingering Covid, a return to something which is clearly not normalcy, but something new and with a pond full of black swans flopping around, it is not dull.  So, how’s that working out for you?  The follies of 2021 at least make writing this column easier.  So, we went digging for inanity for the purpose of making gentle fun of things that broadly annoy us and, shockingly, we found things to talk about.  So, here we are once again.Continue Reading 2021 Golden Turkeys

Here is something helpful that has surfaced amidst the fallout, pain and confusion of the global COVID-19 crisis.  The implementation date for the all-too-simple in theory but not-simple-at-all in practice CECL accounting standard has been pushed back by the passage of the CARES Act for banks until the COVID-19 national emergency declared by the president ends or December 31, 2020, whichever is earlier.  In addition, an interim final rule released by the FRB, OCC and FDIC on Friday, March 27th, now provides an option to delay the effects of CECL on regulatory capital for two years (in addition to the original three-year transition period for banks required to adopt CECL during their 2020 fiscal year).  Banks opting to use both forms of relief would be subject to a modified transition period which would be reduced by the amount of quarters CECL was delayed due to the CARES Act.  No relief was provided for non-banks who are otherwise required to follow CECL.
Continue Reading CECL: The Ugly Pig Running Out of Lipstick

Beany & Cecil was a cartoon.  The Current Expected Credit Loss accounting rules, better known as CECL, which the FASB is insisting will go into effect at the beginning of next year for publicly traded banks and lenders and a year later for all other GAAP reporting entities is not.  Now, heaven forfend that I suggest that the work of the Financial Accounting Standards Board is cartoonish, but there’s a parallel in this pairing of harmless and obscured menace worth noting. 
Continue Reading Beany & CECL

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. 
Continue Reading Dechert OnPoint: Japanese Risk Retention: JFSA Favors Diligence Over Disruption

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 SFIG Vegas 2019

In February, the D.C. Court of Appeals ruled in The Loan Syndications and Trading Association v. Securities and Exchange Commission and Board of Governors of the Federal Reserve System, No. 17-5004 (D.C. Cir. Feb. 9, 2018) (the “LSTA decision”) that a manager of an open market CLO is not required to retain risk under the Dodd-Frank Act and Regulation RR, because only a securitizer which transfers financial assets into a securitization vehicle must retain risk.  No transfer, no risk retention.

In its decision (joined by Judge Brett Kavanaugh), the Court was very clear in its analysis.  Essentially, the decision said “thank you very much, we can read simple English sentences, and the law is crystal clear on this point (if not on much else).”  The regulators may not elide the transfer requirement of the Dodd-Frank Act by calling managers of open market CLOs securitization sponsors, when they don’t transfer assets to a securitization vehicle.  The Court went on to point out that if this was a loophole, it needed to be fixed by Congress, not the regulators.  Blessedly, a satisfying, albeit rare, victory for a plain reading of our mother tongue.  The regulations actually mean what they say!

The broadly syndicated CLO business has taken this ruling to heart and has been beavering away on transaction structures that no longer provide for the retention of credit risk. One big issue in that space now is whether you can square the circle about avoiding risk retention in the US, while somehow meeting the EU risk retention criteria.  But that’s a bit of legerdemain for discussion another day.  What I want to talk about is the utility of the LSTA decision in spaces other than the broadly syndicated CLO space—particularly for commercial real estate single-asset, single-borrower (SASB) securitizations, a product representing almost half of all CRE securitization offerings this year.
Continue Reading The Boundaries of Risk Retention Now That the D.C. Circuit Has Spoken

South Beach played host to the 2018 CREFC January Conference last week, as roughly 1,800 of our best friends in the CRE lending and securitization industry assembled in Miami to reflect on another year gone by and to muse about what’s in store (or out of store, in the case of retail) for 2018. In keeping with tradition, Dechert’s reception at the SLS Hotel was a hotbed of schmoozing, deal talk and employment fair, as over 400 guests took a break from discussing the SEC to… watch the SEC. The excitement of the Alabama-Georgia national championship game was a welcomed excuse to extend the party well beyond the official ending time (a move that is quickly becoming an expected budget buster for this annual event).

As usual, Dechert was well represented at the conference. Dechert’s Laura Swihart served as conference co-chair, and Rick Jones moderated a riveting (ok, not so riveting) panel on “Floating Rate Loans: Circa 2018”.

Conference panelists and attendees were generally bullish, and why wouldn’t they be after a 2017 that saw $95.3 billion in U.S. CMBS issuance (not including the GSEs). For color, that number is up more than 25% from 2016. Not a bad way to usher in the risk retention era.
Continue Reading 2018 CREFC January Conference – Plateau or Status Quo?

Or maybe not.  At the outset, let’s give credit where credit is due.  It was gratifying to read a governmental missive on the capital markets that made sense, showed an actual grasp of how markets function and an awareness of the issues confronting capital formation.  Best damn thing I ever read coming out of the swamp.

The Treasury Report on the capital markets published in early October is indeed pretty fantastic stuff.  The Report covers the Treasury’s recommendation on re-centering many of the rules around the capital markets over a wide range of regulatory issues important to securitization and capital formation.

Let’s focus on the provisions in this Report that are central to securitization.

These can be summarized as follows:

  • There should be one agency with the responsibility for the Risk Retention Rule and we should dispense with the committee-of-committee that’s been running the clown car for the past couple of years. The old saw that “a camel is a horse built by a committee” is certainly proven by the risk retention experience.
  • Regulatory bank capital requirements treat investment in non-agency securitized instruments punitively.
  • Regulatory liquidity standards unfairly discriminate against securitized products.
  • Sponsor risk retention as set out in the Risk Retention Rule represents an unnecessary cost imposed upon securitization.
  • Some of the new and improved (read: expanded) disclosure requirements under Dodd-Frank are unnecessarily burdensome.

In other words, our regulatory regime needs a certain amount of recalibration to achieve its goals of safety and soundness in the financial market place while not impeding capital formation. 
Continue Reading Treasury Report on the Capital Markets: A New Day

As an industry, we remain in high dudgeon over the inanity of much of Dodd-Frank, the ideological and often unhinged regulatory instincts of our various governments and the vast amount of effort, time and money it takes to comply with the mind-numbing complexity of rules and regulations that seem to be largely untethered from the goal of solving actual problems. We winge. We boviate. We testify, write white papers, fund PACs and pursue “engagements” with the regulatory apparatchiki in the pursuit of sensible relief. But do we still really care?

Are we witnessing a process of reconciliation? Could it be that the capital markets have found a way to thrive inside the current regulatory state’s bear hug?
Continue Reading Welcome to Stockholm! We Are Learning To Love Our Regulatory State