[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                      THE DODD-FRANK ACT'S IMPACT

                       ON ASSET-BACKED SECURITIES

=======================================================================


                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 26, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-66



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York           MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 26, 2014............................................     1
Appendix:
    February 26, 2014............................................    29

                               WITNESSES
                      Wednesday, February 26, 2014

Coffey, Meredith, Executive Vice President, Loan Syndications and 
  Trading Association............................................     8
Levitin, Adam J., Professor of Law, Georgetown University Law 
  Center.........................................................     9
Quaadman, Tom, Vice President, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................    11
Vanderslice, Paul, Managing Director, Citigroup, on behalf of the 
  CRE Finance Council............................................    13
Weidner, Neil J., Partner, Cadwalader, Wickersham & Taft, on 
  behalf of the Structured Finance Industry Group (SFIG).........    15

                                APPENDIX

Prepared statements:
    Coffey, Meredith.............................................    30
    Levitin, Adam J..............................................    46
    Quaadman, Tom................................................    65
    Vanderslice, Paul............................................    73
    Weidner, Neil J..............................................   168

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of the National Association of REALTORS...   196
Barr, Hon. Andy:
    Written statement of First Federal Savings Bank..............   197
Quaadman, Tom:
    Written responses to questions submitted by Representative 
      Ross.......................................................   199
Vanderslice, Paul:
    Written responses to questions submitted by Representative 
      Ross.......................................................   212
    Written responses to questions submitted by Representative 
      Mulvaney...................................................   213
    Written responses to questions submitted by Representative 
      Garrett....................................................   216


                      THE DODD-FRANK ACT'S IMPACT

                       ON ASSET-BACKED SECURITIES

                              ----------                              


                      Wednesday, February 26, 2014

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:37 p.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Huizenga, 
Stivers, Mulvaney; Maloney, Sherman, Lynch, Himes, Peters, 
Foster, and Kildee.
    Ex officio present: Representative Hensarling.
    Also present: Representative Barr.
    Chairman Garrett. Good afternoon, everyone. Today's hearing 
of the Subcommittee on Capital Markets and Government Sponsored 
Enterprises is hereby called to order. Today's hearing is 
entitled, ``The Dodd-Frank Act's Impact on Asset-Backed 
Securities.'' And we welcome the members of the panel.
    But before we hear from the panel, we will have opening 
statements. And I will yield myself 5 minutes.
    Today, we are here to examine, as I say, the impact of the 
Dodd-Frank Act on asset-backed securities (ABS). And we are 
privileged to have this panel of great witnesses. I would like 
to welcome all of our witnesses and thank them for agreeing to 
testify about the impact of this law on the $3 trillion ABS 
market. These securities are arguably the most important 
mechanism that American companies have to fund their 
operations, as well as the way nearly all homes and commercial 
properties are financed.
    In many ways, Dodd-Frank is a perfect example of several 
unfortunate trends in the way that Congress and the regulators 
choose to deal with our Nation's problems. However, 
increasingly, whenever something goes wrong the knee-jerk 
reaction of Congress and the regulators seems to be to demand 
that the Federal Government do something, anything about it. 
Obviously, the 2008 financial crisis was a calamity that we are 
still recovering from today.
    But as Representatives, we have a duty to understand what 
happened and see if there was a way the financial system could 
have been more stable. Unfortunately, we did not take the time 
to think through the various unintended consequences that could 
arise before passing Dodd-Frank, and so now we are dealing with 
the repercussions. So 4 years later, the evidence is mounting 
that Dodd-Frank is a disaster for many sectors of the financial 
system, especially for asset-backed securitization. While our 
focus today is mitigating the worst of these consequences, I 
hope we as legislators will learn some lessons from this 
experience.
    You see, successful government regulation is a difficult 
matter, especially when it touches on something as complicated 
and interconnected as our financial system. Passing bills 
without a more complete understanding of their impact, or for 
the sake of showing our constituents that we are doing 
something, is, in fact, a recipe for disaster. As the saying 
goes, ``Act in haste, repent at leisure.''
    And so, we are here today about helicopter parents, who 
hover over their children making sure they never do anything 
dangerous. Today, we seem to have a Congress that functions 
like helicopter parents, and a regulatory system constantly 
worried that somewhere somebody might be putting their money at 
risk. The American people are not the Government's children. 
Investors don't need Congress or the Federal Reserve (Fed) or 
the Consumer Financial Protection Bureau (CFPB) to keep them 
safe. Risk-taking is the reason our markets exist, and without 
risk there can be no innovation, no improvement, and no 
prosperity. Sometimes, these risks pay off, and sometimes they 
don't. But win or lose, they serve a purpose in steering 
capital towards it most productive uses.
    Our financial markets are not a T-ball league. There is no 
way everyone can be a winner. We will inevitably be poorer as a 
society if we stifle such risk-taking or shift the negative 
consequences onto the taxpayers. With Dodd-Frank and 
practically every other major law passed since 2008, we have 
increased the regulatory burden on the private sector. That 
burden falls most heavily on small- and mid-sized businesses, 
who are the biggest drivers of innovation and job creation in 
our economy.
    Yet, we keep making it more expensive and more complicated 
and legally risky to start, or operate, a business. An outside 
observer might even conclude that we have decided that 
entrepreneurs and private markets were all a bad thing and we 
are passing laws designed to discourage them. At the same time, 
we give preferential treatment to government-backed financing. 
And so, over time, this different treatment will lead to fewer 
jobs, less innovation, a less stable economy, and greater 
losses to taxpayers.
    It will also lead to more command and control from 
Washington, and more crony capitalism, where the well-connected 
get all the benefits. So Dodd-Frank takes a lowest common 
denominator approach to all aspects of the economy and 
especially to the ABS market. In terms of risk retention, all 
types of ABS are treated the same, as if they were subprime 
market mortgages, backed securities, or synthetic CDOs--the 
worst of the worst.
    Perhaps the best example of this misguided approach to 
regulation is the treatment of collateralized loan obligations 
or (CLOs). CLOs are a type of ABS that are backed by syndicated 
loans to businesses, and they are a major source of financing 
to mid-sized companies that cannot cost-effectively issue 
corporate bonds. There are many different explanations for our 
financial crisis, but I have yet to hear someone claim the CLOs 
were responsible. And yet, the reproposed rules from Dodd-Frank 
risk retention gives the same broad-brush treatment to CLOs as 
it does to more risky types of securities. By all accounts, 
then, Dodd-Frank will effectively kill off the $300 billion CLO 
market by making it prohibitively expensive to arrange and 
manage a CLO.
    So, why are we destroying this vitally important asset 
class? It makes no sense at all. I can only assume that CLOs 
just got swept up with all the other three-letter acronyms for 
financial products. This market funds businesses of different 
sizes all across the country. For example, in my district we 
have a major car rental company--in my district is a company 
that uses CLOs to finance its operations. Yet here we are 
today, sorting out the unintended consequences of a poorly 
written law and trying to prevent a totally artificial collapse 
of a major piece of the ABS market.
    I am hopeful that we can work in a bipartisan manner to fix 
these regulatorily-created problems in this important market. 
And in the testimony today, I hope that our witnesses will 
provide us with concrete ways to correct these regulatory 
obstacles and ensure that these markets are still able to 
flourish. It is time that we stop being the helicopter Congress 
and start treating financial markets participants like the 
adults that they are.
    And with that, I yield back, and now yield to the 
gentlelady from New York.
    Mrs. Maloney. Okay, thank you so much, Mr. Chairman. And I 
thank all my colleagues and I welcome all our panelists. Thank 
you all for being here. I think it is worthwhile to examine 
Dodd-Frank's impact on the securitization markets, because 
these are complicated markets that are constantly evolving. 
These markets are also very important to our economy. They 
provide financing for families buying a home, businesses that 
want to expand, and students who want to get an education.
    However, we also need to keep in mind that some of these 
securities were at the center of the financial crisis that cost 
our economy a staggering $16 trillion. Too often, the 
incentives of the lender, sponsor, and investor were badly 
misaligned, with disastrous consequences. We need to prevent 
these toxic securities from coming back, without unduly 
disrupting the availability of credit. Dodd-Frank required the 
banks sponsoring the asset-backed security to have some kind of 
skin in the game which gives them an incentive to monitor the 
quality of the loans being securitized.
    It is important to remember that this was not a novel idea. 
In some markets, investors in asset-backed securities had been 
requiring this for years. Dodd-Frank also aimed to bring 
greater transparency to securitization markets by requiring 
disclosure of detailed loan-level information so that investors 
know what they are buying.
    The regulators, in implementing Dodd-Frank, have attempted 
to strike a careful balance, and I applaud them for their 
thoughtful approach. The regulators have been willing to make 
changes to the rule when unintended problems come up, like they 
did when the Volcker Rule inadvertently harmed community banks 
that owned certain CDOs, for example.
    The regulators are now considering another tweak to the 
Volcker Rule that would provide targeted relief to CLOs. And 
both Chair Yellen and Governor Tarullo at our last hearing said 
that this issue is at ``the top of the list,'' for regulators. 
I am pleased that regulators are willing to make these kinds of 
adjustments, but I also hope that the regulators will be just 
as quick to adjust their rules to close loopholes that the 
markets find and to prevent bad actors from evading the rules. 
I very much look forward to hearing from our witnesses on the 
real-world impact of these rules.
    And I reserve the balance of my time for any other Member 
who would like to speak on this after your side. Or go ahead. 
Mr. Sherman, I yield to you for the rest of my 5 minutes. Thank 
you.
    Mr. Sherman. I thank you for yielding. At these hearings, 
we need to focus on whether we have reached the proper 
definition of what securities and other assets need to be 
divested, whether we have the right time frame for such 
divestiture to take place, and maybe we will explore whether 
the bank renouncing certain ownership assets, certain indices 
of ownership, certain rights they have under some of these 
agreements, give them an opportunity to continue to hold them.
    As to the chairman's discussion of helicopter parents, we 
have entities that are too-big-to-fail. We had better 
helicopter over them. Because if they go down, they will take 
the whole family with them. The way to deal with them is to 
break them up. Too-big-to-fail is too-big-to-exist. To tell 
them that they should engage in any kind of risky activity and 
we won't get involved would be an appropriate statement if we 
hadn't lived through 2008 and experienced what this Congress 
does when those that are too-big-to-fail are failing.
    So if we are going to allow too-big-to-fail entities to 
exist, we are going to have to hover over them with a 
helicopter. I think the best solution is that too-big-to-fail 
is too-big-to-exist, and that way we can really end this 
excessive government involvement. Finally, one of our 
witnesses, Mr. Levitin, will point out that Section 939F of 
Dodd-Frank, the Franken-Sherman Amendment, has simply not been 
implemented. And this goes to the heart of why we had the 
meltdown.
    The credit ratings agencies were giving triple-A to alt-A, 
and any pension manager who didn't invest in them was an 
underperformer. And until we deal with the credit rating 
agencies, and the fact that the umpire is paid by one of the 
teams, we are going to have meltdowns in one area or another. 
And unless I get the chairman to cosponsor our bill to end too-
big-to-fail, those meltdowns are going to involve the taxpayer.
    I yield back.
    Chairman Garrett. The gentleman yields back. I have not yet 
decided to cosponsor your bill to end too-big-to-fail because I 
know that this committee passed Dodd-Frank, which we were told 
already ended too-big-to-fail in this country.
    With that, I will now yield to the vice chairman of the 
subcommittee, Mr. Hurt, for 2\1/2\ minutes.
    Mr. Hurt. Thank you for holding today's subcommittee 
hearing on the impact of Dodd-Frank on asset-backed securities. 
I thank the witnesses for being here, and I look forward to 
your testimony.
    In the wake of Dodd-Frank, we have continued to see costly 
unintended consequences arise from regulations that were poorly 
devised and implemented. These regulatory impacts represent 
real costs to consumers, both families and small businesses on 
Main Streets in every congressional district. With the 
recently-finalized Volcker Rule, we began to see these 
consequences almost immediately after it was released, as 
community banks were faced with taking large write-downs. While 
the joint regulators eventually corrected this error, there are 
still several other Volcker-related issues yet to be resolved, 
most notably with respect to CLOs and asset-backed securities.
    In Virginia's 5th District, my District, many companies 
rely on the CLO market to finance their operations, including a 
financial information firm headquartered in Charlottesville, 
with over 2,600 employees, and an auto parts manufacturer in 
Southside. These companies, however, like so many others across 
the country face increased costs as the CLO market reacts to 
the Volcker Rule's treatment of CLOs as covered funds. I think 
most would be hard-pressed to characterize financing the 
operations of these Virginia companies as ``hedge fund-style 
high-risk trading.''
    Yet according to one of the Volcker Rule's Senate sponsors, 
the purpose of the provision was to put a firewall between 
banks in exactly these activities. While that may have been the 
original intent, we now see how a flawed rule, written in a 
flawed process, can extend well beyond its original confines 
and impact our communities. I appreciate the bipartisan group 
of Members who want to correct this misapplication of the 
Volcker Rule, and I look forward to its resolution. And I look 
forward to the testimony of the witnesses.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Garrett. Mr. Peters is now recognized for 3 
minutes.
    Mr. Peters. Thank you, Mr. Chairman, and thank you to our 
witnesses for being here today. And certainly, I would like to 
thank Chairman Garrett and Ranking Member Maloney for convening 
this important hearing.
    I was first elected in 2008, which was during the height of 
the financial crisis. And our Nation at the time was shedding 
800,000 jobs per month, and many small businesses in my home 
State of Michigan found themselves unable to access the capital 
and credit that they needed to continue operations, let alone 
grow and create jobs. During my time in Congress, my top 
priority has been ensuring that small businesses have the tools 
they need to grow, especially access to capital.
    There certainly is no silver bullet, and our Nation's 
entrepreneurs rely on innovative programs like those 
implemented by the States, with the support of funding from the 
State Small Business Credit Initiative, or backed by the SBA as 
well as community banks, credit unions, funding from the 
markets through initial public offerings, venture capital, 
private equity firms, and many others. Collateralized Loan 
Obligations, or CLOs, are part of the spectrum of financing 
that keeps Michigan businesses moving forward. Michigan 
industries that currently rely on CLOs show the diversity of 
Michigan's economy and include not just auto manufacturing and 
parts suppliers, but media and communications firms, textile 
and apparel manufacturers, retail and supermarkets, and 
utilities, as well as gaming and hospitality.
    We need to work together to ensure that Dodd-Frank 
implementation protects consumers and our economy as a whole 
without cutting off access to capital to small businesses. We 
also can't go backwards. We can't go back to allowing the use 
of government-insured money to make speculative bets on bets 
and then on further bets that threaten the entire financial 
system. We can't go back to shedding millions of middle-class 
jobs because of Wall Street overreach. Today, I hope our 
witnesses will address how we can find the balance in our 
markets we need to protect consumers, while maintaining 
liquidity and robust access to capital for our small 
businesses.
    I hope our witnesses touch on how small businesses make use 
of CLOs, the impact a disruption on the CLO market would have 
on them, and where these firms would find alternative financing 
in the event of such a disruption. Most importantly, I hope 
that our panel and my colleagues focus on solutions.
    Thank you, and I yield back.
    Chairman Garrett. Thank you. Mr. Barr is recognized for 
2\1/2\ minutes
    Mr. Barr. I would like to thank the chairman for hosting 
this hearing today, and for the opportunity to analyze the 
discussion draft that I have put forth to fix an overreach by 
regulators in implementing the Dodd-Frank law. Based on 
concerns expressed by committee members on both sides of the 
aisle in a February 5th hearing with the regulators, as well as 
a subsequent letter sent to the regulators by over a dozen 
Democratic members of this committee, I am extremely hopeful 
that we can work together in a thoughtful and bipartisan way to 
fix the chilling effect the Volcker Rule will have in providing 
financing to American companies through Collateralized Loan 
Obligations, better known as CLOs.
    I am interested in getting this issue right because this is 
about jobs, business growth, and economic development in 
communities throughout the country. For example, CLO financing 
has been instrumental in building an infrastructure to bring 
cell phone service to rural areas. It has been used by 
companies in my district like Tempur-Pedic to raise funds fund 
to grow their business. In Kentucky, CLO financing has even 
helped companies which mine coal and provide health care.
    Finally, the importance of fixing the Volcker Rule for 
legacy CLOs, those issued before December 31, 2013, has been 
made clear to me by a community bank in Kentucky which 
considers its investment in CLO debt securities as an important 
part of the bank's investment portfolio. According to this 
community bank, if it is forced by the Volcker Rule to 
liquidate its investments in CLOs and take losses, ``the 
consequences could potentially translate to hiring freezes and/
or layoffs for our employees and higher rates to our 
customers.''
    With Volcker, I am concerned that the medicine being 
prescribed, which would involve banks forced to sell billions 
of dollars of CLO paper in a fire-sale scenario, and the loss 
of credit availability for a wide swath of American companies, 
would be far more damaging to the credit markets than the 
perceived illness which the medicine is designed to fix, which 
would be the highly hypothetical scenario of banks ever 
suffering losses from holding triple-A CLO paper, which 
performed very well during the financial crisis.
    During the February 5th hearing in this committee with the 
Volcker regulators, I asked Federal Reserve Governor Tarullo 
about grandfathering existing CLO investments. I was pleased 
that he responded by saying that he will look at this as the 
first issue on the agenda. As such, I am hopeful that today's 
hearing will help clarify this issue and what is at stake so 
that we can fix this unintended discrimination against CLOs as 
soon as possible.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    The gentleman from Massachusetts, for 2 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. I am very happy that we 
have an opportunity to discuss the improvements made to the 
Dodd-Frank Act asset-backed securities legislation, the 
financial products that were at the very core of the financial 
crisis. I know this hearing was intended to address Dodd-
Frank's effect on asset-backed securities in general, but I 
want to express very serious concerns about the draft 
legislation circulated by my friend from Kentucky.
    Let me just say at the outset that I have enormous respect 
for the gentleman from Kentucky, and I do believe there is a 
real opportunity for some much-needed bipartisanship on the 
issues of voting rights for senior debt securities of CLOs and 
also the way Dodd-Frank addresses risk retention on CLOs. As a 
matter of fact, I signed, along with 16 of my Democratic 
colleagues, a letter to the regulators making clear that the 
voting rights provision in CLO contracts should not, on their 
own, create an ownership interest under the Volcker Rule and 
urging the regulators to provide limited relief to address this 
issue.
    So I am sympathetic to the concerns from holders of these 
securities who are worried that they may have to divest them 
unless they get some relief. We are on the same page on that. 
But the discussion draft goes far beyond the limited relief 
that we requested. It completely exempts CLOs issued before 
December 31, 2013. And in discussions I have had with my staff, 
along with holders of these CLOs, they made very clear to us 
that it was not necessary to grandfather all CLOs issued before 
the Volcker Rule was finalized. They only needed the targeted 
relief we argued for in our letter.
    So it is unnecessary, and reckless, I think, to expand the 
scope of relief for CLOs beyond what the holders of these CLOs 
have requested. And I am very concerned that expanding this 
limited relief will open up the Volcker Rule to gaming by the 
industry. This committee should be very, very cautious about 
rolling back regulations that are critical to Dodd-Frank 
reforms before regulators' ink is even dry on those reforms.
    Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. The gentleman yields back. I believe that 
concludes all of our opening statements at this time. We will 
now turn to our panel. We thank you again for coming. A number 
of you have been here before. And for those of you who have 
not, and for those of you who have and may have forgotten, I 
always ask that you make sure you turn your microphone on, and 
that you pull the microphone as close as you can, because some 
of us just can't hear anymore.
    And without objection, your entire written statements will 
be made a part of the record. We just ask you to summarize it 
during these 5 minutes.
    I now recognize Ms. Meredith Coffey, executive vice 
president of the Loan Syndications and Trading Association. 
Thank you for being with us, and you are recognized for 5 
minutes.

 STATEMENT OF MEREDITH COFFEY, EXECUTIVE VICE PRESIDENT, LOAN 
              SYNDICATIONS AND TRADING ASSOCIATION

    Ms. Coffey. Thank you, and good afternoon, Chairman Garrett 
and Ranking Member Maloney, and members of the subcommittee. My 
name is Meredith Coffey, and I am executive vice president of 
the Loans Syndications and Trading Association (LSTA). Now, 
importantly, the LSTA does not represent the CLO market. 
Instead, the LSTA represents the $3 trillion corporate loan 
market. And our concern is how regulation could severely 
diminish securitization, particularly CLOs, and how this could 
significantly hurt the corporate loan market.
    Critically, this would hurt U.S. companies' access to loans 
they need to expand, to build factories, to build cellular 
networks, and engage in M&A as they grow and build--create 
jobs. We are grateful to be here today to testify on how 
important securitization is to lending and to U.S. companies. 
And, importantly, how regulation, if it is poorly implemented, 
could decimate this important market. Now, as background, U.S. 
CLOs provide approximately $300 billion of financing to U.S. 
non-investment-grade companies.
    These companies include health care companies like 
community health and HCA; food companies like Del Monte and 
Dunkin Donuts; technology companies that are big, like Dell 
Computer, and small, like Netsmart Technologies; and many, many 
more. In fact, roughly 1,000 companies receive financing from 
CLOs and these companies employ more than 5 million people. It 
is a very important source of financing.
    Unfortunately for these companies, CLOs face existential 
threats. The risk retention rules alone threaten to reduce the 
CLO market by 60 to 90 percent. If the CLO market is reduced so 
dramatically, companies that rely on CLOs could see a 
substantial shortfall in financing. Now, it may be these 
companies can seek other sources of financing. But if so, it 
will come with a far higher price tag. If companies could 
replace lost CLO capacity it would cost them $2.5 to $3.8 
billion per year to replace the capacity.
    So the choice for U.S. companies, really, would be to do 
without financing or face markedly higher financing costs. 
Neither bodes well for economic growth and job creation. And 
not only are CLOs an important source of financing for 1,000 
U.S. companies, they have also proven to be safe investments. 
In the last 20 years, the cumulative default rate for CLOs was 
0.41 percent. Not one of the 4,000 triple-A and double-A rated 
CLO notes defaulted, not one.
    This compares extremely well to almost all other asset 
classes, even investment-grade corporate bonds. So what are the 
threats to CLOs and what are possible solutions? The first 
major threat is that the final Volcker Rule arbitrarily 
converts investment-grade CLO debt securities into the 
equivalent of equity through an expansive definition of 
ownership interest. In turn, banks would no longer be permitted 
to hold investment-grade CLO debt. The ramifications are huge.
    U.S. banks hold $70 billion to $80 billion of investment-
grade CLO notes. Moreover, foreign banks hold another estimated 
$60 billion. If banks were forced to sell, which they would be, 
this would materially disrupt the market. In fact, CLO issuance 
in January dropped nearly 90 percent from year-earlier levels, 
primarily due to concerns around the Volcker Rule. It has 
recovered somewhat in February. But do be aware, this is 
because the market participants took comfort that lawmakers, 
particularly members of this committee, are working to resolve 
this problem.
    We appreciate how seriously the committee takes this issue 
and the bipartisan efforts to ensure American businesses 
continue to get the financing they need. The legislation that 
Representative Barr introduced would provide a prospective 
solution and would provide business borrowers with certainty. 
And the letter that Representatives Waters and Maloney, and 15 
other lawmakers sent, has been instrumental in focusing the 
regulators on fixing this problem. We greatly appreciate your 
effort and your focus on this issue.
    But the Volcker Rule is not the only existential threat 
that CLOs face. Risk retention threatens to shutter the CLO 
market, as well. The Dodd-Frank Act requires securitizers to 
retain 5 percent of the credit risk of any ABS. Even though 
CLOs have no securitizer, as defined in Dodd-Frank, the 
agencies have said the CLO manager is the sponsor and thus must 
purchase and retain 5 percent of any new CLO. So for a new $500 
million CLO, a manager must find $25 million to purchase notes 
from that CLO.
    Why doesn't this work? Unlike banks, most CLO managers are 
thinly-capitalized asset managers. They simply do not have the 
capital to invest $25 million to manage each new CLO. And 
because of this, risk retention would dramatically reduce the 
market.
    While the agency's proposed rules do not work for CLOs, we 
have offered a workable alternative. A qualified CLO, which 
would be subject to many of the restrictions and protections, 
and for which managers could purchase and retain 5 percent of 
the equity of the CLO. This should be feasible for agencies and 
it should permit most of the CLO market to survive. Thank you 
again for inviting me to testify, and I would be delighted to 
expand on any of these issues.
    [The prepared statement of Ms. Coffey can be found on page 
30 of the appendix.]
    Chairman Garrett. Great. Thank you very much for your 
testimony.
    Professor Levitin, greetings. And you are recognized for 5 
minutes.

  STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Levitin. It is good to be here again. Good afternoon, 
Chairman Garrett, Ranking Member Maloney, and members of the 
subcommittee. Thank you for inviting me to testify. I am here 
today as an academic who studies structured finance. I have no 
personal financial interest in these matters, and I am not 
speaking on behalf of any organization.
    A key point we should not lose track of in this hearing is 
that structured financial products caused the financial crisis 
of 2008. Mortgage securitizations and CDOs were at the very 
heart of the crisis, and one of the pillars of the Dodd-Frank 
Act are provisions reforming the structured finance market. 
Unfortunately, Federal regulators have been unacceptably slow 
in implementing the Dodd-Frank Act's structured finance 
provisions.
    Several key rules have not been finalized or, in some 
cases, not even proposed. In particular, the SEC has failed to 
fulfill its statutory duties under the Franken-Sherman and 
Merkley-Levin Amendments. The SEC does not seem to have 
internalized that its mission is not just investor protection, 
but also systemic stability. Although some rulemakings have 
been delinquent, regulators have finalized one of the most 
important rulemakings: Regulation VV, which implements the 
Volcker Rule.
    The Volcker Rule prohibits banks from having ownership 
interests in certain investment funds. The Volcker Rule does 
this in order to prevent Federal Deposit Insurance from leaking 
out and covering speculative investment activity. Bank 
ownership interests in investment funds can give rise to 
implicit recourse to banks' balance sheets, and thus to the 
Deposit Insurance guarantee. This is a problem we have 
witnessed repeatedly in the structured finance context for 
various asset classes.
    Over the past 25 years, banks have repeatedly rescued their 
credit card securitization vehicles. And in 2007, banks brought 
sponsored hedge funds and structured investment vehicles back 
on their balance sheets. As long as banks have ownership 
interests in investment funds, and investment funds include any 
type of structured product--it is always done through a fund--
there will always be the specter of an implicit guarantee.
    Accordingly, Regulation VV correctly defines ownership 
interest broadly to include not just formal equity ownership 
but also functional indicia of ownership: the ability to 
control an investment fund or to share in its profits or 
losses. This is just what the accounting rules require. The 
Regulation VV ownership prohibition does not apply, however, to 
funds that invest solely in loans. This has resulted in some 
questions about the status of Collateralized Loan Obligations, 
or CLOs.
    Let's be clear about what a CLO is. A CLO is a 
securitization of interests in high-yield corporate loans. CLOs 
do not typically hold whole loans. Instead, they contain 
syndication pieces that are parts of multi-million or, quite 
often, multi-billion dollar high-yield corporate loans. CLOs 
are not financing small business. They are financing large 
business. They are providing an important piece of the 
financing for large business, but they are not providing all of 
it.
    Like all securitizations, CLOs involve closed-end 
investment funds. CLOs are also generally actively managed. As 
closed-end, actively-managed, structured investment funds, CLOs 
are indistinguishable from CDOs, the very instrument that was 
at the heart of the financial crisis. The only difference one 
can point to is that CLOs' assets are concentrated in corporate 
loans rather than in other assets. Structurally, however, there 
is no difference between a CLO and a CDO, and the CLOs' markets 
solid performance in the past is not a guarantee of its future 
performance.
    Regulation VV will necessitate banks to divest ownership 
interests in some unknown number of legacy CLOs whose assets 
are not restricted solely to loans. But this is no different 
than any other divestment required by Reg VV. And given the 
liquidity of the CLO market and the relatively long divestment 
window, the divestment should not result in a fire sale. To the 
extent that legacy CLOs are a concern, and I do not believe 
that we have an empirical basis for making that conclusion, 
there are surgical fixes available that do not require 
legislation.
    Going forward, Reg VV will not have an impact on the CLO 
market. The CLO market has already figured out several 
transactional solutions to enable continued bank investment in 
the asset class. And as Ms. Coffey noted, the CLO issuance is 
actually up this month, after having been down in January. The 
other major rulemaking that I wish to briefly mention is the 
credit risk retention proposal under Section 941. And I just 
want to frame it in maybe a different way than it is usually 
thought of.
    I think it is generally accepted that there is a--there can 
be conflicts of interest between securitization sponsors and 
securitization investors. We have two basic routes in which we 
can address this. We can either try and deal with it ex ante by 
making securitization sponsors essentially partners in the 
securitization, making them buy a piece of the securitization. 
And that means that they are going to have to have some capital 
for that, which is going to be a problem. Or we can try and 
deal with this on the back end by having effective 
representation and warranty enforcement.
    I am not especially optimistic that we are ever going to 
get effective back-end enforcement. Therefore, I think we need 
to be thinking about how we can make risk retention work. Thank 
you.
    [The prepared statement of Professor Levitin can be found 
on page 46 of the appendix.]
    Chairman Garrett. Thank you.
    From the U.S. Chamber, welcome back, Mr. Quaadman. You are 
recognized for 5 minutes.

 STATEMENT OF TOM QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL 
       MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Mr. Chairman, and thank you, 
Ranking Member Maloney. And I would also like to thank the 
members of the subcommittee for your continued leadership on 
issues of importance to Main Street businesses. I would also 
like to take a quick moment to thank Congressman Barr for 
developing legislation to address the CLO issue, as well as 
Ranking Member Maloney for spearheading the letter that was 
signed by many Members asking the regulators to fix the issues.
    The Chamber has been very concerned with the impacts of the 
Dodd-Frank Act on the ability of Main Street businesses to 
access capital. Our view has been, with all the different major 
regulatory pieces of Dodd-Frank and other regulatory 
initiatives, that they need to be looked at holistically to see 
how they work in conjunction with other rulemakings and other 
initiatives such as Basel III and even money market fund 
reforms.
    Shortly after the Volcker Rule was proposed in December 
2011, we sent a letter to the regulators asking for such a 
holistic review to see how the Volcker Rule would impact the 
ability of businesses to enter the debt and equity markets and 
how it would interact with other regulations. And we also asked 
that the regulators conduct an economic analysis. With that 
letter, we included a survey that we had taken of small-, 
medium-, and large-sized businesses on the impacts and 
impediments and costs of the proposed Volcker Rule, at that 
time, with their ability to access different forms of capital.
    And one of the solutions that we proposed at that time was 
also that the regulators hold roundtables. About a month later, 
after that letter was sent in, Governor Tarullo from the 
Federal Reserve testified from this table to the full Financial 
Services Committee, saying that the regulators involved in the 
Volcker Rule did not understand the marketplace activities and 
what participants were doing in the markets. I am sorry to say, 
2 years past that hearing--despite, I think, good faith efforts 
to change some of the substantive issues with the Volcker 
Rule--I don't think the level of understanding of the 
regulators on marketplace activities has necessarily changed.
    So as you have already heard, CLOs provide $300 billion in 
financing to small and medium-sized businesses as well as those 
businesses which can't find financing in other forms. And CLOs 
performed well during the financial crisis versus other 
securitizations. They are different in that the CLO managers 
have skin in the game, and there is an alignment of interests 
with the investor communities.
    However, as we have seen, the CLOs have been impacted by 
the risk retention rules as well as by the Volcker Rule. These 
impacts are no longer theoretical. In January, Bloomberg 
reported that CLO issuances in the United States are down by at 
least 60 percent, and that CLO activity is now beginning to 
migrate over to Europe. So, there are solutions to the 
problems. As I said earlier, the regulators, in terms of the 
procedure in developing Dodd-Frank, played fast and loose with 
what their legal requirements were. However, we believe that 
the legislation proposed, or the discussion draft put forward 
by Congressman Barr does put a little bit of a stronger public 
policy statement to the regulators to get this problem fixed, 
though I do believe we have a unity of interests here to get 
the problem fixed.
    These issues are not partisan, and we would hope that both 
sides can agree to a solution. Additionally, as I said, we 
thought these issues should have been resolved during the 
rulemaking process itself. While we think it is a good first 
step that the agencies have formed an interagency working group 
in the development of the Volcker Rule implementation issues, 
we also believe that there should be a working group of market 
participants; financial institutions; small, medium, and large 
businesses; global businesses; institutional investors; and 
others that can work with the regulators to actually ``war 
game'' Volcker throughout the conformance period in order to 
discover any unintended consequences. And then to also craft 
solutions to those unintended consequences.
    As we have seen with CLOs today, as we had the hearing a 
couple of weeks ago with trust-preferred bonds, we are sort of 
getting into a ``Whack-a-Mole'' situation, where issues keep 
popping up one after the other. The other situation I think we 
all want to avoid is that we all wake up on July 23, 2015, when 
the conformance period is ended, and markets are volatile and 
businesses don't have access to different products because 
these unintended consequences had not been worked out.
    We also believe the interagency working group, as well as 
this market participant working group, should report to the 
committee and the subcommittee regularly as to their progress. 
And I am happy to take any further questions you have.
    [The prepared statement of Mr. Quaadman can be found on 
page 65 of the appendix.]
    Chairman Garrett. The gentleman yields back, and I thank 
the gentleman.
    Mr. Vanderslice, you are now recognized. Welcome, first of 
all, to the panel. And you are now recognized for 5 minutes for 
your testimony.

STATEMENT OF PAUL VANDERSLICE, MANAGING DIRECTOR, CITIGROUP, ON 
               BEHALF OF THE CRE FINANCE COUNCIL

    Mr. Vanderslice. Thank you, Chairman Garrett and Ranking 
Member Maloney, for giving me the opportunity to testify today. 
I am co-head of the U.S. CMBS group, and head of the commercial 
mortgage distribution efforts for Citibank global markets. 
However, I am testifying today on behalf of the Commercial Real 
Estate Finance Council, or CREFC. CREFC members include multi-
family and commercial lenders, loan and bond investors, and 
servicing firms of all types.
    I will focus my comments today on the recently reproposed 
risk retention rules and CMBS. CMBS is an integral component of 
commercial real estate lending because it expands the pool of 
available loan capital beyond what balance sheet lenders, 
mostly banks and insurance companies, can contribute. In 2013, 
CMBS provided almost 25 percent of all CRE financing. That is 
over $80 billion in loans that were made. CMBS also provides 
about 34 percent of all CRE loans made in tertiary markets, and 
24 percent of the loans made in secondary markets.
    No other lending source comes close to servicing these 
markets to that extent. To give you a better sense of the 
significance of this industry, Mr. Chairman and Ranking Member 
Maloney, in your combined MSA alone, there are thousands of 
properties with outstanding CMBS loans totaling over $66 
billion. And that is outstanding today. The proposed CMBS 
retention rules impose a burden on borrowers that is projected 
to appreciably increase their cost of funds.
    A strong consensus across all CREFC constituencies was 
reached on a set of recommendations to the risk retention rules 
as reproposed this past August. CREFC and its members are 
supportive of the goal of risk retention in the proposed rules. 
However, we believe strongly that the rule should provide 
optionality and flexibility for achieving these goals. Simply 
put, there is more than one means to an end.
    Allowing our industry this optionality and flexibility will 
allow risk retention to be achieved fully, but with the least 
possible amount of marketplace disruption. Today, I will focus 
on three key areas: single borrower-single credit transactions; 
b-piece structure; and qualified commercial real estate (QCRE) 
parameters. First, single borrower-single credit transactions 
(SBSC): There is a strong consensus across all CREFC 
constituencies to completely exempt single-borrower-single 
credit deals from the retention regime. SBSC deals involve only 
one loan, or a pool of cross-collateralized loans that 
essentially function as one loan. SBSC transparency is 
extremely high because granular loan details are reported to 
potential investors, and SBSC loss experience has been 
exceedingly low. Furthermore, because these transactions 
effectively contain only one loan, it is much easier for 
institutional investors to evaluate the credit of the 
transaction before investing, and they have broader access to 
data because the deals are typically done in the private 
market.
    Second, b-piece structure. For CMBS only, the proposed 
rules allow a third-party b-piece investor to buy the first-
loss position to bear the retention obligation. The actual 
amount of retention required under the reproposed rules is 
quite significant, effectively 5 percent of the cash proceeds 
or 5 percent of the fair value of the bond sales, which is 
about double the capital investment currently made by b-piece 
buyers in deals that we are doing today. To address this, the 
regulations allow two BP buyers to buy the retention obligation 
and co-invest side-by-side.
    Although this helps to address access to capital, it 
creates a host of other issues for the b-piece investors. To 
address these issues, CREFC recommends allowing a senior 
subordinate structure for b-piece investors. This would still 
accomplish the retention regime objectives, but would be 
workable for the industry without materially increasing the 
cost of funds to the borrowers.
    Third, QCRE parameters. The proposed rules would exempt 
qualified commercial real estate (QCRE) loans from the 
retention regime if specified underwriting parameters are 
fulfilled. The QCRE goal is to reward conservative 
underwriting. There was a broad consensus among CREFC members, 
including among investors, that QCRE parameters should be 
modified by making certain changes to the proposed QCRE loan 
parameters. Based on historical data from all CMBS deals since 
1997, our recommendations would expand the universe of QCRE-
eligible loans from around 3 percent of CMBS loans to about 15 
percent.
    Using the same data, the cumulative loss percentages for 
those qualifying loans would fall to less than 1 percent. This 
is all in contrast to the other qualifying asset exemptions 
under which the vast majority of assets will qualify. Mr. 
Chairman, we want to make risk retention work, not eliminate 
it. And we believe that the recommendations I have outlined 
today, and that CREFC has advanced in its comment letters, 
would help accomplish that objective.
    And I would be happy to answer any questions you may have.
    [The prepared statement of Mr. Vanderslice can be found on 
page 73 of the appendix.]
    Chairman Garrett. And I thank the gentleman for your 
testimony.
    Mr. Vanderslice. Thank you.
    Chairman Garrett. Last, but never least, Mr. Weidner is 
recognized for 5 minutes.

STATEMENT OF NEIL J. WEIDNER, PARTNER, CADWALADER, WICKERSHAM & 
TAFT, ON BEHALF OF THE STRUCTURED FINANCE INDUSTRY GROUP (SFIG)

    Mr. Weidner. Thank you.
    Chairman Garrett. You are welcome.
    Mr. Weidner. Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee, my name is Neil Weidner. I am a 
partner in the capital markets group of Cadwalader, Wickersham 
& Taft. I have spent the majority of my 22 years of practice in 
the field of structured finance, and I have been actively 
involved in the CLO market since the late 1990s.
    Today, I would offer testimony on behalf of the Structured 
Finance Industry Group, or SFIG, a trade industry group with 
over 240 institutional members that focuses on improving and 
strengthening the broader structured finance and securitization 
market. Securitization touches the lives of your constituents 
on a daily basis, and provides economic benefits that help Main 
Street to access affordable credit. SFIG believes in a well-
regulated and liquid securitization marketplace for all asset 
classes.
    I am here today to discuss two specific aspects of the Act 
which, if enforced in the current form, will have an adverse 
impact on individuals and businesses in your communities. The 
clearest example of this is the effect that the final 
implementation of the Volcker Rule and the proposed risk 
retention rules are having on the CLO market. The uncertainty 
due to Volcker is negatively affecting the marketplace today. 
Analysts have predicted that 2014 estimates of CLO issuance 
would drop by 18 percent, to $55 billion.
    This equates to a loss of up to $10 billion in financing to 
U.S. companies. The proposed credit risk retention rules also 
present a serious threat to the long-term viability of the CLO 
marketplace. If implemented as currently proposed, CLO issuance 
and the amount of credit provided to U.S. businesses could be 
reduced by 75 percent or more. To put this in context, U.S. 
companies that employ 7.5 million people use the CLO 
marketplace to expand their businesses, including opening new 
factories, paying suppliers' invoices, or simply making 
payroll.
    Without significant changes to the proposed regulatory 
framework, these companies, such as ManorCare, Pinnacle Foods, 
and Berry Plastics may lose the ability to receive affordable 
financing provided by the CLO marketplace. We appreciate the 
recent attention that Federal agencies and lawmakers on both 
sides of the aisle have given these issues. The market has 
reacted positively to the bipartisan focus of this committee 
and, thankfully, largely to your efforts and the prioritization 
by the regulators.
    The CLO market experienced a slight upturn this month, that 
was alluded to. But as such, we urge the committee to maintain 
the momentum towards developing a near-term solution for the 
Volcker Rule. And absent a proper solution, there is a strong 
concern that the market will quickly contract again. We also 
look forward to continuing our constructive dialogue with the 
regulators on the proposed risk retention rules.
    Without a workable solution for retention, the long-term 
viability of the CLO marketplace has also been called into 
question. However, SFIG believes there are simple, 
straightforward solutions for providing regulatory clarity to 
the participants in the CLO marketplace. With respect to 
Volcker, SFIG has asked for regulatory clarity regarding the 
definition of ownership interests as it relates to debt 
securities in CLOs. This approach does not require the 
reopening of the Volcker Rule.
    We simply ask that regulators provide additional 
interpretive guidance, which can be in the form of a simple 
FAQ. Such an approach would help provide certainty both on a 
go-forward basis, and for existing CLOs, commonly referred to 
as legacy CLOs--that this issue, were this issued prior to the 
regulation--that were legacy CLOs that were issued prior to 
regulation.
    In terms of risk retention, SFIG believes both the 
structured finance and alignment of interest of participants 
had contributed to the CLOs strong performance before, during, 
and after the crisis. In fact, from 1993 to 2012, no CLO debt 
security rated higher than A has ever experienced a principal 
loss. Such tranches represent up to 75 percent of the capital 
structure of a CLO. These are tranches that are bought by 
banks, including community banks such as the Federal Savings 
Bank of Elizabethtown, Kentucky.
    Nevertheless, we continue to work constructively with the 
regulators to create flexibility to satisfy the retention 
requirements through an array of options as have been proposed 
for other asset classes. Specifically, SFIG believes that the 
agencies should consider adopting both a third-party retention 
option for CLO holders, as has been proposed for CBS, and a 
qualified CLO option. SFIG believes that these options offer 
flexibility for the industry in meeting retention requirements.
    Further, SFIG is committed to continued engagement with the 
members of this committee and regulators, as we work on 
developing solutions for the CLO marketplace. Chairman Garrett, 
Ranking Member Maloney, Congressman Barr, and members of this 
subcommittee, we appreciate your leadership on these issues. 
And if we do not find solutions that work for both regulators 
and the marketplace, then the companies that create jobs, and 
make capital investments to grow their businesses and provide 
goods and services will suffer.
    Thank you.
    [The prepared statement of Mr. Weidner can be found on page 
168 of the appendix.]
    Chairman Garrett. Thank you. Again, I thank the panel. At 
this point, I recognize myself for 5 minutes.
    So let's start with some of the basics, I guess. Mr. 
Weidner, you were just wrapping up, so I will just throw it 
right back to you. You heard the assertion in testimony--CLOs 
and CDOs, are they essentially the same thing that we are 
talking about here?
    Mr. Weidner. No.
    Chairman Garrett. Okay. Gee, I don't normally get just a 
short answer like that. I want to ask the Administration 
questions, so--
    Mr. Weidner. No, no, I appreciate it. I will elaborate.
    Chairman Garrett. Great.
    Mr. Weidner. What we are talking about is two different 
types of products. I think the only similarity that they really 
bear is the fact that they have three acronyms in their names. 
I think if you look at the performance of CLOs and the 
structural features that have been embed--that are a part of 
how CLOs are structured, you look at the granularity of the 
borrowers who are--there would be 100 to 200 borrowers who are 
typically part of the CLO.
    Chairman Garrett. Right.
    Mr. Weidner. Across many different industries. What you 
have seen is the underlying asset class has been able to--has 
proven itself. There are a number of other structural features 
which has demonstrated, including through the downturn in the 
economy and through the recession that the actual product 
works.
    Chairman Garrett. Okay.
    Mr. Weidner. As compared to ABS deals, which have had the 
comparison in terms of the performance results are 
significantly different.
    Chairman Garrett. Right. So it is a difference in 
performance. My guess is that you are going to give me the 
panel answer on this. The difference is that the underlying 
assets are different, as well. So, where we saw the problem in 
the crisis was in what type of assets. And what type of assets 
are we dealing with here?
    Mr. Weidner. The types of assets that were put into CLOs 
are not the originate to distribute type assets. They are well-
underwritten, they are granular in terms of those--there is a 
broader array and diversity. But it really goes down to the 
assets that have been included, and the structural features in 
the deal. That if the deal starts--
    Chairman Garrett. We were talking about mortgage-backed 
assets and some of the other cases, were we not, during the 
crisis?
    Mr. Weidner. Yes, we were.
    Chairman Garrett. Right. Okay. And someone--Mr. Vanderslice 
or Mr. Quaadman, do you want to throw--the question here is who 
are we actually dealing with in this situation? Are we dealing 
with big businesses being financed, or are we dealing with 
middle-sized businesses that are being financed? I would assume 
that big businesses wouldn't necessarily need this, but who are 
actually--who are the customers, I guess--yes, that is the 
right word--Mr. Quaadman?
    Mr. Quaadman. Sure. In fact, the LSTA and the Chamber are 
working together on a letter with corporate treasurers on the 
risk retention rule. And I could tell you, in going through the 
companies that use this, it is thousands of companies. It is 
primarily mid-sized and small companies.
    Chairman Garrett. But what--define that in size, somehow.
    Mr. Quaadman. You are looking at small-cap and mid-size 
companies. You are not going to look at a Fortune 500 company, 
you are not going to look at companies of those sizes. Because 
they have many different ways to access capital. So, this is 
going to be much smaller businesses.
    Chairman Garrett. Okay, great.
    Ms. Coffey, one of the things I was confused about--but I 
guess everybody is confused about this--is the two rules that 
are out there. Dodd-Frank has the 5 percent risk retention 
requirement, right, on the one hand? And then you have the 
Volcker Rule that prohibits a bank holding more than 3 percent 
equity in a covered fund, right? So, that is the current law. 
How does the industry deal with that, first of all?
    Ms. Coffey. I do believe there is language that suggests 
that for securitizations, there should not be a conflict 
between the risk retention rules and the Volcker Rule, other 
specific language that those--that one is exempt from the 
other. But I think if you combine the two--the concern with 
respect to the Volcker Rule and risk retention--
    Chairman Garrett. Well, no. Let me step back. You are 
saying the intent was that there should not be a conflict, but 
there is a conflict.
    Ms. Coffey. Correct, although I--
    Chairman Garrett. Mr. Weidner, do you want to jump in?
    Mr. Weidner. Just to the extent that you are required to 
withhold, retain something greater for risk retention, it 
overrides the 3 percent.
    Chairman Garrett. Okay.
    Ms. Coffey. So to that end, there is not a conflict within 
the Rule. But, obviously, there are extreme conflicts as far as 
what the Volcker Rule would do for CLOs, existing CLOs. And 
risk retention, obviously, would dramatically reduce new CLO 
formation by 60 to 90 percent. So, they are very problematic.
    Chairman Garrett. Right. In my last 13 seconds, and with 
that reduction in the size, then, the cost to the market would 
be--I think we heard some numbers on that.
    Ms. Coffey. Yes. We have done research which indicates that 
if the CLO market was reduced by 60 to 90 percent, borrowers 
would end up paying $2.5 billion to 3.8 billion in additional 
interest payments per year simply because CLOs went away.
    Chairman Garrett. I understand. Thank you.
    The gentlelady from New York?
    Mrs. Maloney. Thank you. And I would like to ask Meredith 
Coffey and others to comment if they so wish. Ms. Coffey, I 
understand that many in the CLO industry think that the new 
risk retention proposal won't work for the CLO market because 
CLO managers don't have the balance sheet to retain the 5 
percent of each deal. I think that is a valid concern. But 
didn't the regulators take that into account when they proposed 
a separate loan arranger option for CLOs which would allow CLO 
managers to comply with the risk retention rule without keeping 
5 percent of each deal on their own balance sheet? And can you 
explain why you don't think the loan arranger option will work?
    Ms. Coffey. Great. Thank you, Congresswoman Maloney. One of 
the issues around the arranger option on risk retention is that 
it would say that a bank originator would have to retain--hold 
and retain 5 percent of what they call a ``CLO-eligible term 
loan bank.'' When that was reproposed in the rules in August, 
we went and engaged with our bank members and asked them if 
this was feasible or if there was some form that was feasible.
    And ultimately, that became problematic, because the same 
banking regulators on the supervisory side did not want banks 
to agree to commit and retain, and never hedge, and never sell 
a position in a loan because the banking supervisors themselves 
say that they want banks to maintain the flexibility to work 
out of bad situations. So on one side you have the regulatory 
side of the body saying you must hold and retain 5 percent, and 
on the other side you have the supervisor saying we cannot have 
you agree to never, ever hedge or never, ever sell.
    So you had a conflict there. When we were talking to banks 
and they told us about this conflict, we understood that 
ultimately that option was not feasible because they would 
ultimately not be permitted to do that. Again, with never 
hedging and never selling.
    Mrs. Maloney. I would like to ask anyone on the panel to 
comment, and yourself if you so wish. Are there alternative 
options that would work for CLOs while also complying with the 
spirit of the risk retention rule?
    Ms. Coffey. Yes. Actually, one of the things that I would 
like to hit on is what we call a ``qualified CLO concept.'' And 
the idea behind a qualified CLO is having a CLO that is a high-
quality CLO which meets a number of the agencies' objectives. 
So it would support strong underwriting, that is a big 
objective. It would facilitate the continuity of credit. It 
would ensure the alignment of interests with the managers and 
investors. And it would limit the disruption in the market and 
protect investors.
    How would this qualified CLO do this? For a CLO to become a 
qualified CLO, its governing documents would have to require 
six major restriction categories. First of all, restrictions 
around asset qualities. The CLO must invest in higher-quality 
non-investment grade loans. Second, restrictions around the 
portfolio composition. It would have to be a highly diversified 
portfolio. Third, structural protections in the CLO, including 
mandating a minimum amount of equity in the CLO to protect the 
debt holders.
    Fourth, alignment of interest between the CLO manager and 
its investor in a number of different forms. Fifth, 
transparency and disclosure, ensuring investors have just a 
wealth of information about the CLO itself and every single 
asset in the CLO. And sixth, regulatory oversight, basically 
requiring the CLO manager to be a registered investment 
advisor, being regulated by the SEC, and being subject to 
fiduciary responsibilities to its investors.
    If we marry all of those together, I think ultimately what 
we have is a very high quality CLO that meets all the 
objectives of the agencies.
    Mrs. Maloney. Okay, thank you.
    Professor Levitin, I would like to ask you about Mr. Barr's 
bill to deal with the CLO issue. While I support a narrow, 
targeted solution for CLOs as outlined in the letter that I 
wrote, I am also concerned about creating loopholes in the 
Volcker Rule. So in your opinion, could this draft bill create 
loopholes for banks to go around the Volcker Rule? And if so, 
is there a way to fix the language of the bill?
    Mr. Levitin. Congresswoman Maloney, let me start by saying 
I have not actually seen the language of Mr. Barr's bill. I 
have seen some descriptions of it, and I would have concerns 
about whether it is overly broad and whether it might, in fact, 
create some loopholes for Volcker Rule evasion. What is not 
clear to me is the--let's put risk retention aside. For the 
Volcker Rule, there clearly is some amount of legacy issue that 
we may need to address.
    Going forward, though, it is not at all clear why there 
needs to be any sort of intervention by Congress in order to 
address the CLO market for Volcker Rule purposes. The market is 
already starting to find solutions to make sure that CLOs do 
not--are either not covered funds, or that banks' investments 
do not qualify as ownership interests.
    Mrs. Maloney. My time has expired.
    Chairman Garrett. Thank you.
    And now, to the vice chairman of the subcommittee, Mr. 
Hurt, for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. I just wanted to follow 
up on the chairman's line of questioning relating to the 
difference between CLOs and CDOs. And I wanted to direct my 
question to Mr. Vanderslice and Mr. Weidner. Professor Levitin 
says in his testimony that for all intents and purposes, CLOs 
are indistinguishable from CDOs. And he says that there is no 
clear difference between a CLO and either a CDO or a hedge 
fund.
    That seemed to be the opposite of what Mr. Weidner was 
saying. So I was wondering if you, Mr. Vanderslice, and then 
Mr. Weidner, could discuss the difference between CLOs and CDOs 
in the context of the 2008 crisis. And the performance, and 
then how we as Congress look at this issue going forward to 
make sure that we are not--that we are taking the most prudent 
course. Mr. Vanderslice, if you don't mind?
    Mr. Vanderslice. Yes, I am actually here just for CMBS. So 
I am going to defer to other witnesses.
    Mr. Hurt. Okay.
    Mr. Weidner. Again, I think you need to look at the 
transaction. There are a couple of things we have outlined in 
the written testimony that we have submitted, that the types of 
features that the way CLOs have been structured are ones that 
have demonstrated its resiliency through the downturn. And I 
think that the types of features that are in those deals--they 
include the fact that 90 percent of these deals include senior 
secured loans. It is diversified across borrowers, diversified 
across industries.
    The deals are actively managed by regulated investment 
advisors who have--or there is a regulatory overview of them. 
We have features where if the deal starts to underperform, it 
has the ability to delever itself. And there is an alignment of 
interest. The managers themselves receive the bulk of their 
compensation on this coordinated basis. And they are very much 
incented to manage in the portfolio in the way that one would 
hope.
    And when--I think the real striking evidence for us is to 
say, okay, if we go through all that, that all sounds very 
nice. But if you actually look at the statistics going from 
1993 to 2012, including going down for the recession, the 
historical performance numbers prove out that they have shown 
the resilience, see, because of the way they have been 
structured. And I would also like to think that part of the 
reason that they have been so resilient is, also, the 
underlying borrowers themselves, who are part of these pools. 
Did the deals get stressed? They did get stressed.
    Deals that were down--every deal that I can tranche that I 
can thing of that was downgraded became upgraded, was upgraded 
back to where it was, a particular tranche. So I think there 
really is a separate analysis of what features make this a good 
product. And there is proven track history. Then when you look 
at ABS, the comparison--and certainly I think there have been 
some that have been submitted--it is a much different product. 
There was much less diversification and there are other issues.
    Mr. Hurt. All right, that is great. And then let me just--
because my time is limited, unfortunately, I want to make this 
question to Mr. Quaadman. And I wanted to thank--first of all, 
thank the Chamber for its demonstrated push to try to require 
that the cost--that there be a cost-benefit analysis for the 
entire impact of Dodd-Frank, and not just looking at these 
impacts on an individual policy basis, but looking at them from 
a holistic standpoint.
    But if you could try to quantify for people back home who 
will be affected by, or could be affected by the 
implementation--and we predict will be affected by the improper 
implementation of Volcker as it relates to these securities. 
What is the real impact for, as I mentioned in my opening 
statement, the auto parts manufacturer that relies on this 
financing to be able to operate. And how do you quantify the 
increased costs that absolutely get--I believe get--will get 
passed on to the customer, consumer?
    Mr. Quaadman. Let me take that question in two separate 
ways. One is, in that letter from December 2011 with the server 
that we have put in with the regulators we found that with 
large borrowers, or large companies that were in the debt 
markets, their costs would increase by 25 to 50 basis points. 
Or with smaller borrowers, it would actually go up by 50 to 100 
basis points. So when you take a look at the size of debt 
markets, you are talking in the tens of billions of dollars, 
potentially, when you put it all together.
    When you are looking at CLOs here, particularly as this 
dries up--because remember what happened in January, the 
markets were reacting that these products were going to go 
away. The reason why they have come back a little bit in 
February is because you are here talking about solutions, the 
regulators are saying something. So the markets are sort of 
looking--while they may not be going away.
    If they do go away, those small businesses and the 
businesses you are talking about, you are going to have to go 
to a more risky form of financing if you can even find it.
    Mr. Hurt. Okay.
    Mr. Quaadman. So that is going to make our system that much 
less stable.
    Mr. Hurt. And jack up the costs.
    Mr. Quaadman. And jack up the costs.
    Chairman Garrett. Thank you. The gentleman yields back. The 
gentleman's time has expired.
    The gentleman from Massachusetts for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. I think that the 
arguments that you are making for changes in the risk retention 
rule are much more valid than an exemption from the Volcker 
Rule. So let me talk about risk retention and what we are 
requiring. I understand the structure is much different, and 
that Ms. Coffey, you have talked about this QCLO. Do you 
anticipate--I haven't drilled down on the documents, but do you 
anticipate that these are corporate loan only?
    Because I think, generically, CLOs could also include bonds 
or derivatives. And to that extent, Mr. Levitin is right. They 
present some of the same risks that we are trying to get at for 
CDOs. So they are similar in that respect. So are you 
anticipating that this QCLO would be limited just to corporate 
loans?
    Ms. Coffey. Certainly. Thank you for the question. In our 
proposal, we recommended that in the asset quality bucket that 
in the QCLO that 90 percent of the assets would be senior 
secured loans to U.S. companies that are subject to annual 
audits and that whole thing. We were saying that perhaps up to 
10 percent could be things like corporate bonds to those same 
companies. But I think that is a point of discussion.
    But we ultimately see this as being a vehicle that is 
specifically focused on providing financing to U.S. companies.
    Mr. Lynch. What about the equity tranche where the risk is? 
How do you adjust that in the QCLO?
    Ms. Coffey. Certainly. One of the things that we said in 
the QCLO is that we should have structural protections that are 
mandated in a qualified CLO. And that the equity component of 
the qualified CLO should be at least 8 percent of the assets.
    Mr. Lynch. Okay. And what would you--so what would be the 
protection for the equity tranche? Are you saying 5 percent of 
the 8 percent? Is that--
    Ms. Coffey. What we are saying is the risk retention 
component of the CLO manager. Now, remember, a CLO manager is a 
thinly-capitalized asset manager.
    Mr. Lynch. Yes.
    Ms. Coffey. And so what we are saying is in order to do a 
QCLO, in order to manage CLOs going forward like they have done 
for the last 20 years and have seen no losses whatsoever, a CLO 
manager would have to purchase and retain 5 percent of the 
equity of that CLO.
    Mr. Lynch. Okay.
    Ms. Coffey. So a CLO manager would have to bring--find, and 
bring $2.5 million simply to run its business going forward.
    Mr. Lynch. All right.
    Mr. Levitin, what do you think?
    Mr. Levitin. I actually am somewhat sympathetic to the QCLO 
concept.
    Mr. Lynch. Me, too.
    Mr. Levitin. The devil is in the details. But the concern 
with risk retention is that you are going to have a conflict of 
interest--without it, there is going to be a conflict of 
interest between whoever is putting together the 
securitization, whether it is CLOs or mortgages or what have 
you, and the investors. And as Ms. Coffey has outlined the QCLO 
concept, it seems to be--if all the things she laid out are 
actually done right, that probably addresses a lot of those 
concerns.
    Mr. Lynch. Yes. Okay. I guess I am going to reserve my 
right to object at some point. It sounds like you are on the 
right path. And I agree that structurally it presents a 
different set of problems than what we originally focused on. 
And it is sort of like the trust preferred security solution 
that we came up with recently. But I think it is, in Mr. 
Levitin's words, the devil is in the details here on how we get 
this done. But I think there could be a way forward.
    I just hope that the Democrats and Republicans can work 
together here. I think, just a flat-out exemption, as in the 
language of the draft bill, is a non-starter. I don't think it 
is necessary, and I think that would get in the way of us 
coming to a general agreement here that I think would serve the 
industry and investors and taxpayers, as well.
    I will yield back, thank you.
    Chairman Garrett. The gentleman yields back.
    Mr. Stivers is recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate the 
witnesses being here today, and I appreciate their testimony. 
So under the Volcker Rule, when you combine, I guess, the 
Volcker Rule, the qualified mortgage rule, the QRM rules, the 
risk retention rules, the proposed rules of Basel III and other 
capital requirements, what--I guess I will direct this question 
to Mr. Quaadman. What cumulative impact do you think all that 
will have on the ABS market?
    Mr. Quaadman. I think overall it is going to have a 
negative impact. If you take a look at the way that business is 
financed, when you take a look at Basel III it is going to 
impact their commercial lines of credit. It even impacts their 
ability just to park cash in banks. When you take a look at 
risk retention, and with the Volcker Rule, in particular with 
CLOs, as we have talked about, that is going to be impacted, as 
well.
    What we don't know yet with the Volcker Rule is how the 
Volcker Rule is going to start to impact other debt and equity 
instruments that corporate treasurers use and how they are 
underwritten.
    Mr. Stivers. I think Mr. Hurt asked some questions that you 
answered about what that will do to the cost of borrowing. And 
you brought up the ABS, or the CLO problem. And given that the 
last questioner talked about bipartisanship, I think on the CLO 
issue, there has been some bipartisanship. And I want to remind 
the committee of the remarks of the ranking member, Ms. Waters, 
on January 15th, when she said that, ``I think that we are able 
to work with the regulators on some of the issues being 
identified, such as the CLO issue.''
    And I think there is a real acknowledgment that in the 
Volcker Rule, there is a problem with the CLO. I guess this 
question is for Ms. Coffey. What do you think the easiest way 
to fix the CLO rule would be?
    Ms. Coffey. With respect to the Volcker Rule?
    Mr. Stivers. Yes.
    Ms. Coffey. We are very heartened by the work that Mr. Barr 
has done on this with the prospective legislation. We think it 
goes a long way to addressing the issues both in dealing with 
the legacy issues of CLOs that were purchased over many years. 
We think that will be very helpful. And we also think the 
language that he proposed for clarifying what an ownership 
interest would be will be very helpful going forward.
    One of the things, however, that has emerged since Mr. Barr 
has been working on his legislation is that we have heard from 
the regulatory agencies that they might expand their definition 
of what an ownership interest is, to like subsection D, 
subsection E, which talks about conflating, perhaps, interest 
payments with excess spread. And to the extent that continues 
to be a problem, we might want to provide additional support on 
that bill.
    Mr. Stivers. So what Ms. Coffey said, and I think it makes 
sense, is that Mr. Barr's approach is a good starting point for 
fixing the CLO problem. And I think while there have been some 
potential new issues brought up or are being discussed by the 
regulators that could require some additional changes, I think 
his approach is certainly a good start. And I want to applaud 
him for all the work that he has done on this issue, and thank 
him on behalf of manufacturers in my district that use asset-
backed securities and on behalf of folks who have been 
purchasers of CLOs in the past. I think all the work he is 
doing will make a big difference for the future of the whole 
ABS market.
    I guess my other question is on coordination. And we will 
just kind of ask the panel, since I have a minute and 15 
seconds left. Do you agree with the statement that the 
regulators have coordinated all the regulations that I talked 
about well so that they interact well? If the answer is yes, 
raise your hand. I would like to note that no one raised their 
hand, and that I do believe there are real problems with the 
interactions of many of these rules and they haven't looked at 
the cumulative impact in how they interact with each other.
    And while it was stated earlier that the risk retention 
rules may supersede some of the requirements on what the limits 
under the Volcker Rule are, it is still unclear what the 
interactions of many of these rules are doing together. And I 
think it is really important that the regulators sit down and 
try to coordinate these rules. Because as they come out drip, 
drip, drip one by one there is no real coordination on this and 
not enough coordination that makes them work well together.
    Does anybody disagree with that statement? I would like to 
note for the record that everyone agreed with that statement.
    Mr. Weidner. We agree. And I think what we see--what we are 
heartened to see is that there is now an effort to try to 
coordinate. And I think that is going to be very helpful, as we 
try to address these issues across multiple agencies and try to 
come to consensus. And--
    Mr. Stivers. It is a starting point. Thank you.
    Mr. Weidner. It is a starting point. And I think that we 
are appreciative of that, but to this point I think it was 
something that was needed.
    Mr. Stivers. Thank you. I am out of time, so I will yield 
back. Thank you, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    Mr. Foster is now recognized.
    Mr. Foster. First off, I would like to compliment the 
chairman and the bipartisan members of the committee who have 
engaged on this issue. I think it has been very productive and 
a breath of fresh air. And seeing the committee and the 
regulators coming in and trying to deal with, in particular, 
the legacy issues, which I think are really more an unintended 
consequence of this.
    But I was more interested--my one question has to do with 
going forward. Ms. Coffey, you had mentioned the interest cost 
savings from borrowers, basically having to do with the 
existence of the CLO market. And the CLO market, by most 
accounts, has significantly healed itself by finding Volcker 
compliance ways of doing business. And so, it is at least 
partially recovered.
    I was wondering what fraction of the lowered cost of 
interest rates really have been recaptured by that healing and 
the workarounds for the Volcker Rule versus what fraction--
because of compromises in the structure that the market might 
have found all by itself without the Volcker Rule presumably 
has some increased interest rate cost. What fraction of the 
potential savings from CLO have been recaptured by the market 
healing itself?
    Ms. Coffey. I think that is an excellent question. The 
Volcker Rule is an immediate dislocation in the market that we 
are dealing with today. So, we are observing that right now. 
And any healing that we have seen with respect to Volcker has 
come from the comfort market participants are taking in the 
fact that lawmakers are taking this issue very seriously and 
working together to resolve it. So, we are hoping we can heal 
that.
    The numbers I quoted before, the fact that you could see if 
CLOs go away, that it would cost U.S. companies $2.5 to $3.8 
billion of annual interest. That excludes concerns around 
Volcker and was focused significantly on risk retention. If 
risk retention went forward the way it is currently written, it 
is estimated it would reduce CLO market by 60 to 90 percent. 
And that in and of itself, excluding Volcker, would cost U.S. 
companies $2.5 to $3.8 billion.
    Mr. Foster. Okay. Is there now, or will there be--would it 
be possible in the future to quantify the impact of the 
restructures to work around Volcker that have taken place in 
the marketplace? To eyeball roughly what the economic damage 
was or was not?
    Ms. Coffey. I think once we come through and resolve this, 
which I do hope that we can do with your help, then I think we 
can look back and say, here is the damage that we avoided 
because we did resolve it. It may be a little too early to 
assess that now.
    Mr. Foster. Okay. Well, thank you. That was my one 
question.
    I yield back.
    Chairman Garrett. Mr. Barr?
    Mr. Barr. Thank you, Mr. Chairman. I appreciate the 
testimony of the panel. And Ms. Coffey, a question to you. You 
testified that it has been estimated that if Volcker is not 
changed, demand among banks for CLO notes could drop by 80 
percent, significantly reducing CLO formation and reducing 
credit availability. If these borrowing--if borrowing costs do 
increase because of lack of credit availability, what will that 
mean to these businesses that rely on CLO financing?
    Ms. Coffey. Right. I think that is a very good question and 
very important going forward. I think one of the things that is 
important to understand is just how broad the Volcker problem 
is. Some people say it is hard to quantify exactly how much of 
a problem Volcker is. But in fact, that information is 
available and it is available publicly. Reuters published a 
publication and a chart that observed that 62 percent of U.S. 
CLOs have bonds in them, usually less than 3 percent, but do 
have bonds in them.
    And all CLOs have bond buckets so they are able to invest 
in bonds. And hence, they would end up being covered funds. 
Moreover, these CLOs will not go away any time soon. There are 
about $300 billion of CLOs outstanding today. In July 2015, it 
is estimated there will still be $240 billion of CLOs 
outstanding. So, this is a big problem. This goes to the issue 
that you asked of what will this do to borrowers. If you have a 
situation where the Volcker Rule basically impedes U.S. banks 
and some foreign banks from investing in CLOs, you could see 
their appetite reduced by about 80 percent. They just will not 
participate in the CLO market.
    And ultimately, that leads to our other point, in that we 
could see a significant cost of financing for U.S. companies. 
What happens when you have a significant cost of financing, or 
a decreased credit availability for companies? That means these 
companies which have over 5 million employees can't build new 
factories, and can't build new cellular networks; they can't 
expand. They can't combine and merge to build bigger companies 
that can compete effectively globally.
    It ultimately would have a very destructive effect on U.S. 
companies.
    Mr. Barr. With all respect to Professor Levitin, when he 
talks about systemic stability and the need to fulfill the 
Dodd-Frank's mandate for systemic stability, what does this 
actually do in practice in terms of the stability of the 
financial markets?
    Ms. Coffey. I think it certainly reduces financing for U.S. 
companies. And I think financing for U.S. companies is very 
important for the economic situation in the United States.
    Mr. Barr. Professor, in all fairness, I will give you an 
opportunity to respond.
    Mr. Levitin. I greatly appreciate that. I think there is a 
really important assumption underlying Ms. Coffey's analysis. 
And that is that to the extent that banks are not able to 
invest in CLOs, the pool of money that would be invested there 
just disappears from the economy. It doesn't. Banks may reduce 
their lending, but they can also put that money into other 
forms of asset classes. And it is actually a very complicated 
analysis that I don't think anyone has done to figure out 
really what the ultimate cost effect is going to be on cost to 
financing.
    It may go up.
    Mr. Barr. But we do--in January, we had a cratering of the 
CLO market. So we do know that without any kind of 
congressional intervention, we saw what it was going to do. Let 
me--because my time is running out.
    Mr. Levitin. We saw that for 1 month, but we have this 
month also. I would just add to this that CLOs are one way that 
companies can finance themselves. There are other ways. It is 
not as if companies are not going to have financing routes. 
This isn't as if no one could get a mortgage. This is just one 
particular financing channel.
    Mr. Barr. Professor, thanks for your testimony. Since my 
time is running out, I do want to get at kind of the crux of 
the matter here. In your testimony, you argued that structured 
financial products fueled the housing bubble and produced the 
financial crisis.
    I would be interested to hear from the other members on 
whether or not there was any reason why either the Volcker Rule 
or the risk retention rules should not apply to CLOs in a way 
that they would apply to mortgage-backed securities. In other 
words, is there a reason why CLOs are different?
    Mr. Weidner. If I could take the--I think we have 
consistently said, our membership, is that CLOs are not the 
type of originate-to-distribute type of securitization that is 
cause for concern, and has been really the impetus behind risk 
retention in terms of aligning interests in a way that ensures 
that the underlying assets are well-underwritten. What we have 
seen, and it is just very--we have seen the structural feature 
of these deals, the quality of the assets and how they have 
been actively managed, the rigorous reviews that they have.
    There are a number--those types of things have led to the 
performance of those assets through very difficult times. So 
from our point of view, there is an alignment of interest. 
There hasn't been--who is to say who the sponsor of these are? 
The assets are acquired in from the market. So from our point 
of view, there isn't a driver here to say that risk retention 
is needed because we need someone to hold for the duration of 
the deal to make sure that the pool is being properly--is put 
together.
    But one thing to appreciate about all this--and when you 
think about different type of ABS--CLOs are the only asset type 
that are actively managed. Pool assets are coming and going 
out, you could turn a portfolio over to 35 to 40 percent. So I 
think that what we are seeing is the structural feature and the 
criteria of what goes into underwriting an asset going in are 
the types of things that risk retention is getting at, which is 
to make sure that there are good underwriting standards of the 
assets that come in.
    And so we see a difference as opposed to these other ABS 
assets, which are static, and you are wanting to make sure--
most of these are static, and making sure that somebody retains 
an interest who is actually securitizing these assets. This is 
not that product.
    Mr. Barr. Thank you.
    I yield back.
    Chairman Garrett. Thank you. The gentleman yields back. And 
that completes our hearing for today. We have been called to 
votes. I once again want to thank each and every one of the 
witnesses, those who have been here before and new witnesses, 
as well.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And without objection, we are hereby adjourned.

    [Whereupon, at 4:03 p.m., the hearing was adjourned.]

                            A P P E N D I X


                          February 26, 2014


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