Tags: Volcker | Dodd-Frank | CLO | asset-backed securities

House Subcommittee Defends Asset-Backed Securities

By    |   Tuesday, 04 Mar 2014 06:55 AM

Twice last week the House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises, chaired by Scott Garrett, R-N.J., jumped headlong into some very complex capital markets issues.

On Feb. 26, the Subcommittee held a hearing titled "The Dodd-Frank Act's Impact on Asset-Backed Securities." Then, on Feb. 28, the Subcommittee took on "Equity Market Structure: A review of the SEC's Regulation NMS," which will be the subject of a separate article.

The panels were dominated by industry witnesses complaining that implementation of the Dodd-Frank Act is hurting the economy, as the Committee continues to develop the theme that the Act should not be implemented, and virtually all affected parties should be exempt.

A threshold question to be asked about any congressional hearing is, "Who is the client; what is the agenda?" Perhaps it is a complete coincidence, but each of the hearings featured a witness from the legendary law firm of Cadwalader, Wickersham & Taft.

In opening statements, Garrett complained bitterly that federal regulators were acting like "helicopter parents" trying to prevent entrepreneurs, innovators and job creators from taking risk through vehicles like the $300 billion asset-backed securities (ABS) market, while Carolyn Maloney, D-N.Y., argued that securities like those the ABS industry promotes were at the center of the 2008 financial crisis that caused $16 trillion in losses, and she expressed the hope that the regulators would go forward with the Volcker rule and curb bank securities activities.

Neil Weidner, a partner at the aforementioned Cadwalader law firm who represented the Structured Finance Industry Group, sought to stake out a moderate position in favor of an ABS market that would be both liquid and well-regulated. He explained that collateralized loan obligations (CLOs) are securities that are backed by assets consisting of 90 percent commercial loans, and he offered reassurance that these are managed by investment advisers regulated by the Securities and Exchange Commission.

He maintained that CLOs performed well during the 2008 episode of the ongoing financial crisis, but the health of this market is threatened because under the Volcker rule, banks would not be allowed to own CLOs, and he complained that it is unfair to require the sponsors of CLOs to retain 5 percent of the risk, because the business model of these sponsors is based on fees, not on profits from the funds.

His group has cleverly designed a device called a "qualified CLO" that would be exempt from the risk retention rule, and the opponents of the Volcker rule call on the regulators to provide exemption through interpretation.

Adam Levitin of Georgetown University Law Center, the Democratic witness, warned that vehicles like CLOs and collateralized debt obligations are indistinguishable from hedge funds, so they should be subject to the Volcker rule, and he questioned the assertion that the ABS market would be seriously harmed, because other investors would replace banks.

Surprisingly, Levitin questioned the utility of the risk retention rule, given that many sponsoring banks are still too big to fail, so they don't care.

Some Democrats on the subcommittee are amendable to working with Republicans to create an industry-friendly bill, whereas other Democrats, led by Maloney, worry about creating more regulatory loopholes.

If the House passes a bill, it would face a tougher road in the Senate.

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Robert-Feinberg
Twice last week the House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises, chaired by Scott Garrett, R-N.J., jumped headlong into some very complex capital markets issues.
Volcker,Dodd-Frank,CLO,asset-backed securities
548
2014-55-04
Tuesday, 04 Mar 2014 06:55 AM
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