[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF THE DODD-FRANK ACT
AND BASEL III ON THE FIXED INCOME
MARKET AND SECURITIZATIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 24, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-74
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
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
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee BILL FOSTER, Illinois
RANDY HULTGREN, Illinois GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
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Page
Hearing held on:
February 24, 2016............................................ 1
Appendix:
February 24, 2016............................................ 51
WITNESSES
Wednesday, February 24, 2016
Carfang, Anthony J., Partner, Treasury Strategies, Inc........... 5
Coffey, Meredith, Executive Vice President, Loan Syndications and
Trading Association............................................ 6
Green, Andrew, Managing Director, Economic Policy, Center for
American Progress.............................................. 8
Johns, Richard A., Executive Director, Structured Finance
Industry Group................................................. 10
Plunkett, Jeffrey, Executive Vice President and Global General
Counsel, Natixis Global Asset Management....................... 14
Renna, Stephen, President and Chief Executive Officer, Commercial
Real Estate Finance Council.................................... 15
Stanley, Marcus, Policy Director, Americans for Financial Reform. 12
APPENDIX
Prepared statements:
Carfang, Anthony J........................................... 52
Coffey, Meredith............................................. 61
Green, Andrew................................................ 73
Johns, Richard A............................................. 85
Plunkett, Jeffrey............................................ 111
Renna, Stephen............................................... 116
Stanley, Marcus.............................................. 158
Additional Material Submitted for the Record
Poliquin, Hon. Bruce:
Written statement of the Mortgage Bankers Association........ 169
THE IMPACT OF THE DODD-FRANK ACT
AND BASEL III ON THE FIXED INCOME
MARKET AND SECURITIZATIONS
----------
Wednesday, February 24, 2016
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 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Royce,
Neugebauer, Duffy, Stivers, Hultgren, Wagner, Messer,
Schweikert, Poliquin, Hill; Maloney, Sherman, Hinojosa, Lynch,
Scott, Himes, Ellison, and Carney.
Ex officio present: Representative Hensarling.
Also present: Representatives Barr and Capuano.
Chairman Garrett. Good morning, everyone. The Subcommittee
on Capital Markets and Government Sponsored Enterprises will
come to order.
Today's hearing is entitled, ``The Impact of the Dodd-Frank
Act and Basel III on the Fixed Income Market and
Securitizations.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. And also, without
objection, members of the full Financial Services Committee who
are not members of the subcommittee may sit on the dais and
participate in today's hearing.
I will now recognize myself for 3 minutes for an opening
statement.
Today, we are here to examine the impact that Dodd-Frank,
as I said, and an old rule stemming from Basel III are having
on our fixed income and securitization market and, more broadly
than that, to begin to examine the impact that they are having
on our economy and job creation in the United States.
And I thank each and every one of our many witnesses for
being here today. This is one of the largest panels we have had
in a little while here at the subcommittee, so I feel bad for
some of those who are maybe squeezed in the middle, in the very
middle. And maybe those at the very end who can then sum up
what everybody else said here. I hope you feel well at home.
I also want to thank the sponsors of the legislation that
we will be considering today for their work on some of the very
important issues that we will be discussing.
Some of us will recall that nearly 5 years ago when former
Fed Chairman Ben Bernanke was here, he was asked whether the
Fed or any regulator had simply considered the cumulative
impact of this tsunami of post-crisis rules.
And you may remember his answer to that. It was one word:
No. More recently, both Treasury Secretary Lew and Fed Chair
Yellen have also admitted, when asked the same question from
this committee, that despite the fact that regulators are
rolling out ever-more complex capital liquidity rules, nobody
has taken a moment to study how they will all work combined or
in tandem with one another.
So instead of a coordinated, well-thought-out legislative
and regulatory approach in the wake of the financial crisis,
what do we have? What we have instead is a series of ad hoc
initiatives that are ostensibly designed to make the financial
markets safer, but which in reality will only serve to put a
lid on our economic potential in this country while sowing the
seeds of the next financial crisis.
As the saying goes, do not confuse motion with progress.
This misguided approach began with the Dodd-Frank Act which
was rushed through Congress on a partisan vote with little
regard for what its provisions would mean for Main Street
America. Take, for example, the treatment of collateralized
loan obligations, or CLOs.
CLOs, as we all know, are vitally important to a $420
billion asset class that provides financing to Main Street
businesses, which have performed extraordinarily well relative
to all the other asset classes.
Yet, the risk retention rules that Dodd-Frank created
treated CLOs as a highly risky asset, perhaps because the then-
Majority thought that anything with an acronym sounded risky to
them.
The same could be said for certain commercial mortgage-
backed securities under the risk retention rules.
And so, I want to take a moment to thank Mr. Barr and Mr.
Hill for putting together legislative solutions that would
address Dodd-Frank's risk retention rules and also to help
preserve these financing mechanisms--alphabet soup, if you
will, of capital liquidity rules stemming from Basel III and
the impact that they will have on fixed income and
securitization markets, both of which are vital sources of
financing in this country.
Prudential regulator overlords that make up the Basel
Committee have made it their mission to stamp out risk in our
capital markets by issuing a burdensome and extraordinarily
complex set of rules. And these rules come with innocent-
sounding names such as liquidity coverage ratio or net
stabilized funding ratio or fundamental review of the trading
book.
We know that in reality, these rules could have the
ultimate effect of increasing risk in the banking system,
cutting off services for non-financial end users, and putting
American businesses at a disadvantage relative to their
European counterparts.
And so, I look forward to our subcommittee stepping up
today and examining these issues that the regulators have
failed to do over the years.
Again, I thank all of our witnesses, and the sponsors of
the bills as well.
And we will now yield 5 minutes to the ranking member of
the subcommittee, Mrs. Maloney.
Mrs. Maloney. Thank you. Thank you, Mr. Chairman, for
calling this hearing.
And I thank all of our panelists for being here today.
The U.S. bond markets are incredibly important to our
economy. They allow companies of all sizes to raise capital, to
expand their businesses, to hire more employees or to invest in
new equipment.
U.S. companies raised a record $1.5 trillion in the bond
market in 2015. But it isn't just corporations that raise money
in the bond markets. All types of loans, from mortgages to auto
loans, are funded in the securitization markets.
So these markets are a key part of our economy and it is
appropriate for us to review the state of these markets.
However, we also need to keep in mind that the
securitization market, particularly for subprime mortgages, was
a source of a lot of problems during the financial crisis.
Many of the banks that were making the mortgage loans or
packing together mortgage-backed securities did not retain any
of the risk for themselves, which meant that they didn't have a
strong incentive to make sure that the loans were high-quality
and that the borrowers could afford them.
Dodd-Frank addressed this problem by requiring that the
sponsors of securitizations retain at least 5 percent of the
risk on their own balance sheets. This rule, known as the
``risk retention rule,'' was intended to align the interests of
the sponsors with the interests of the investors in the
securitization. If the underlying loans go bad, both the
sponsor and the investor will suffer.
Former Chairman Barney Frank called the risk retention
rule, ``the single-biggest issue that we dealt with in Dodd-
Frank.''
Two of the bills that we are considering today would codify
exemptions to the risk retention rule that go beyond what the
regulators determined was appropriate. One bill would broaden
the exemption for commercial real estate loans from the risk
retention rule, while the other would create a new exemption
for securitizations of certain corporate loans.
While I am interested in hearing from our witnesses on
these bills, I think we should be very careful about rolling
back such an important rule, which was one of the most
important aspects of Dodd-Frank, especially before the rule has
even taken effect.
The third bill that we are considering today is sponsored
by my good friend from Massachusetts, Mr. Capuano. His bill
would make a technical fix to the Volcker Rule that would avoid
the need for banks to rename huge numbers of funds for no good
reason.
The Volcker Rule prohibits banks from owning hedge funds or
private equity funds. And I believe this is critically
important because it prevents banks from taking on the risks
that come with hedge funds and private equity funds which are
not appropriate for banks.
However, the Volcker Rule does allow banks under limited
circumstances to organize and offer hedge funds in private
equity funds. In other words, the bank can help get the fund
started, but once the fund is up and running, the bank cannot
have a significant ownership stake in the fund.
One condition of this exception for getting a fund started
is that the bank and the fund can't share the same name or a
variation of the same name. The intent of this name-sharing ban
was to ensure that banks don't feel obligated for reputational
reasons to bail out a fund that is initially organized.
By a quirk of the way the Volcker Rule was drafted,
however, this name-changing ban applies not just to the bank's
name, but also to any investment adviser that is affiliated
with the bank, even if the investment adviser has a completely
different name than the bank.
It is not clear to me how this furthers the original goal
of deterring banks from bailing out funds that they organized
since the fund would have a completely different name than the
bank.
So I look forward to the discussion of Mr. Capuano's bill,
and the other two bills, and the testimony today.
Thank you very much. And I yield back. Thank you.
Chairman Garrett. I thank the gentlelady.
I now yield 2 minutes to the vice chairman of the
subcommittee, Mr. Hurt.
Mr. Hurt. Thank you, Mr. Chairman.
This committee has heard time and time again about the
unintended consequences and negative impacts on the economy of
Dodd-Frank and the Basel III capital requirements.
When I travel across Virginia's 5th District, I continue to
hear from my constituents that Washington is making it harder,
not easier, for them to do business.
America's deep and liquid capital markets have a direct
impact on Main Street businesses and consumers all across our
country. And if Washington persists in imposing a one-size-
fits-all approach, these capital markets and those who depend
on them will be adversely affected. And this means less
opportunity and fewer jobs for the people that we represent.
While it is important to maintain a strong and robust
financial system, capital requirements must take into account
the complexities of different business models. The domestic
securitization market has a profound impact on consumer
lending, from auto loans to credit cards.
If this market becomes unstable and uncompetitive, it
follows that many domestic market participants will be
encouraged to shutter their securitization businesses and
allocate capital and resources abroad. If this happens, it will
impact hardworking Virginians.
It is easy for unelected bureaucrats to make these
decisions, but ultimately the people across Main Street America
are those who feel the impact.
I am hopeful that our witnesses will be able to address
some of these concerns.
I appreciate the committee's focus on this issue and its
continued focus on ensuring that our small businesses and
startups have the ability to access the necessary capital in
order to innovate, expand, and create the jobs that our local
communities need.
I look forward to hearing from our witnesses.
And Mr. Chairman, I thank you for the time, and I yield
back.
Chairman Garrett. Thank you. The gentleman yields back, all
time having been consumed.
We now turn to our panel. And again, thank you, all the
members of the panel, for being with us today for this hearing.
We will begin with Mr. Carfang. But before we do that, just
for those of you who have not been here before, without
objection, your complete written statements will be made a part
of the record, and you will be yielded 5 minutes at this time.
Mr. Carfang?
STATEMENT OF ANTHONY J. CARFANG, PARTNER, TREASURY STRATEGIES,
INC.
Mr. Carfang. Thank you, Chairman Garrett, and members of
the subcommittee. My name is Tony Carfang and I am a partner
with Treasury Strategies. We are a consulting firm that
specializes in Treasury management, payments, and liquidity.
I am here today on behalf of our several hundred clients--
businesses, State and local governments, financial
institutions, hospitals, and universities--who are active
participants in the capital markets and rely on fixed income
and securitization for their short-term capital requirements.
Our American capital markets are the broadest and deepest
and most robust in the world and we applaud all the work that
has been done since the financial crisis to make them safe and
to help keep them that way.
Unfortunately, many of the regulations, which in isolation
further specific objectives, in combination we are now seeing
as they are beginning to be implemented are causing some toxic
interaction. In some sense and in some parts of the market, it
is kind of like a high school chemistry experiment gone awry.
When we put all these things in the same tube, all sorts of
things are happening here. And some parts of the market are
being clogged and choked.
We applaud your efforts in considering the three bills that
are under consideration today. And what I would like to do is
sort of set a context for what is happening in the capital
markets as a result of this chemical interaction, which argues
for the need for specific items of relief.
And I would like to say a word about risk retention. As all
of our clients know, risk can neither be created nor destroyed.
It can only be transformed; it can only be shifted. And to
think that risk retention in and of itself will eliminate risk
is kind of like thinking that car insurance will make you a
better driver. It doesn't happen; it just shifts the
responsibility to someone else.
Now, how do we know that this chemical reaction has gone
awry? Let me state a couple of things that we see in our
consulting practice and our clients are struggling with every
day.
Since the regulations following the financial crisis have
begun to take shape, there are 1,460 fewer banks in the United
States than there were in 2010. That is a 20 percent decline.
And that means that capital formation, particularly for small
businesses and municipalities, is bottle-necked, there is less
choice, there is less opportunity.
In the 80 years that the FDIC has been chartering banks, in
the United States we have created about 150 new banks each and
every year going back through the 1930s.
In 2010, only 5 new banks were chartered. And in the 5
years since 2010, a grand total of only 2 additional banks have
been chartered.
So we are not getting the innovation, we are not getting
the robust formation at the bottom of the pyramid, which we all
need.
I would like to turn our attention to money market funds in
particular. Prime money market funds provide the short-term
capital for businesses and for financial institutions. They buy
their short-term paper.
Prime money market funds are the subject of an SEC
regulation designed to take effect in October. And since the
regulation was announced, 56 prime money market funds have
converted to government money market funds, which means that
about $264 billion that used to be lent to U.S. businesses and
financial institutions is now tucked away in government
securities. That money has been removed from the private
economy.
Now, one particular item of concern is the tax-exempt money
market fund which municipalities rely on for their
infrastructure improvements, for their schools, their roads,
their hospitals, college dormitories, and whatever.
Since the enactment of the regulation--in my testimony when
I wrote this last week, I said that 27 tax-exempt money market
funds had been closed. And as a result, some municipalities and
State governments will not get the financing that they need.
Since then, in just 1 week, that 27 has grown to 45. And
just this morning, there were announcements of closures of tax-
exempt funds that specifically service Massachusetts, New York,
and California municipalities.
So, we have a serious problem here.
Mr. Chairman, you mentioned Basel III and the alphabet
soup, the HQLA and all these capital requirements. What that
does is it impairs the banks' ability to lend and sends
investors off the grid.
So in conclusion, I want to say that these regulations have
stranded quite a bit of capital. And we need to put that back
into the productive economy, and the three pieces of
legislation you are considering today are a great step toward
that end. Thank you very much.
[The prepared statement of Mr. Carfang can be found on page
52 of the appendix.]
Chairman Garrett. Thank you.
Moving next to, from the Loan Syndications and Trading
Association, Ms. Coffey. Welcome to the subcommittee. You are
recognized for 5 minutes.
STATEMENT OF MEREDITH COFFEY, EXECUTIVE VICE PRESIDENT, LOAN
SYNDICATIONS AND TRADING ASSOCIATION
Ms. Coffey. Great, thank you. And good morning, Chairman
Garrett, Ranking Member Maloney, and members of the
subcommittee.
My name is Meredith Coffey. I am EVP of research at the
LSTA and I am here to speak about QCLOs.
Now, it is important to note the LSTA does not represent
the CLO market. Instead, we represent the $4 trillion corporate
loan market.
Our concern here today is risk retention, how it could
diminish CLOs and how that could impact and hurt the corporate
loan market. This in turn would hurt U.S. companies' access to
credit. It is the loans they need to expand, to refinance, to
merge and grow, and to create jobs. That is why we are here
today.
What we would like to discuss today is: one, how important
CLOs are for lending to U.S. companies; two, how risk retention
already has impacted the CLO market; and three, we want to
voice our support for H.R. 4166 introduced by Representatives
Barr and Scott.
This bill offers a solution that meets both the letter and
the spirit of the Dodd-Frank Act, we will talk about why, and
it will permit a safe and well-managed CLO to continue to
provide financing to American companies.
To start off, I would like to discuss the non-investment-
grade loan market. The reality is most American companies are
not large investment-grade companies, like Microsoft,
McDonald's, and Walmart. The vast majority of American
companies are non-investment-grade. Moody's rates 2,000
companies, and 70 percent of those are non-investment-grade.
Who are these companies? They are cable companies, like
Cable Vision. They are airlines, like Delta and American. They
are food companies, like Dole and Del Monte. They are
restaurant chains, like Wendy's, Burger King, and Dunkin
Donuts. And if you need to burn those donuts off, they are also
gym companies, like 24-Hour Fitness and Equinox.
The reality is CLOs provide more than $400 billion of
financing to these companies and others like them. So why do
folks get so concerned when they hear CLO?
In large part, it is because folks assume that these must
be CDOs. They are not CDOs. CLOs are not CDOs; they do not
perform like them. They are not originated to distribute
securitizations. CLOs are just simple and transparent
portfolios of corporate loans.
In a report released in June 2015, Moody's Investors
Service calculated the 10-year impairment rate of CLOs. It was
1.5 percent. For CDOs, it was 45 percent, nearly 30 times the
impairment rate from CLOs. CLOs are clearly not CDOs.
Unfortunately, risk retention will do great damage to CLOs
and to the companies that rely upon them. Last week, Moody's
issued a report on companies' needs to refinance and noted that
CLOs will meet a smaller portion of corporate refunding needs
due in part to risk retention.
In fact, risk retention already is affecting CLOs. Starting
in the second half of 2015, last year, investors began
requiring CLOs to be risk-retention compliant or at least have
a detailed plan to comply. Why? Because the investors required
CLOs to show they had the ability to refinance or at least show
the fact that they would exist in 2 years.
The result? CLO formation dropped 20 percent last year.
Second-half 2015 CLO formation was down 40 percent from first-
half levels.
And risk retention is already picking winners and losers.
Thirty CLO managers that issued CLOs in 2014 could not do so in
2015, largely due to risk retention. This is not just a CLO
problem. It will impact a number of companies' ability to
refinance their debt.
Moody's said non-investment-grade companies have more than
$700 billion of debt coming due in upcoming years. Bloomberg
reported that Fed officials have begun to worry about credit
availability. And regulators themselves have said risk
retention will reduce the supply of credit.
So what will happen? If U.S. companies cannot refinance
their debt because CLOs are not there for them, companies
either will have to pay out substantially to entities like
hedge funds, or worse, they may not find credit and this could
lead to downsizing, job cuts and, worst-case scenario, hospital
bankruptcies.
But this scenario does not need to happen. Instead of
curtailing the CLO market, we ask the committee to consider and
pass H.R. 4166 which contains a sensible alternative, the QCLO.
How does this work? A CLO would have to meet requirements
in six areas: asset quality; portfolio diversification; capital
structure; alignment of interest; regulation of the manager;
and enhanced transparency and disclosure.
If a CLO does this, then the manager can purchase and
retain 5 percent of the equity, which critically, along with
the subordination of its fees, would absolutely meet the 5
percent risk retention requirement in Dodd-Frank.
Thus, the QCLO not only requires 5 percent credit risk
retention, but it also adds quality restrictions into the mix.
Thank you very much for your time. I look forward to any
questions you may have.
[The prepared statement of Ms. Coffey can be found on page
61 of the appendix.]
Chairman Garrett. Thank you very much for that.
Mr. Green, welcome to the panel, and you are recognized for
5 minutes.
STATEMENT OF ANDREW GREEN, MANAGING DIRECTOR, ECONOMIC POLICY,
CENTER FOR AMERICAN PROGRESS
Mr. Green. Thank you, Chairman Garrett and Ranking Maloney,
for the opportunity to testify on this important topic.
I am Andy Green, managing director of economic policy for
the Center for American Progress.
And I would like to make five points today: first, that
fixed income markets are better thanks to Dodd-Frank and Basel
III; second, reforms reduced what Paul Volcker calls the
liquidity illusion, helping to protect us from bubbles and
bailouts; third, transparency in the fixed income markets
should be increased; fourth, Congress and regulators should be
proud of the changes put in place and finish the job; and
lastly, the bills being considered today by the subcommittee
are unwise and unnecessary, and they should not be adopted.
First, fixed income markets are better. For months, the
financial industry has warned of a so-called liquidity crisis
following the implementation of new and supposedly burdensome
regulations.
The argument goes as follows. Basel III capital charges,
the Volcker Rule, limits on risk taking and holding positions
are killing dealer inventories. Without inventories, clients
would not be able to trade. Spreads will widen and costs of
financing will go up, and the real economy will be harmed.
But as Paul Volcker and others have long known, reality is
entirely the opposite. Don't take my word for it or even his.
The New York Fed, of all places, and FINRA, the broker-dealer
self-regulatory organization, have all concluded that liquidity
is as good or better than pre-crisis levels.
Here is the data. Primary issuance of corporate bonds is
above pre-crisis levels. A record $1.5 trillion was issued in
2015 compared to approximately $750 billion in 2005.
Borrowing costs are at or near all-time lows. Overall, even
asset-backed securitization issues also look similar to the
levels that existed in 2000, 2004. All of this varies by
particular market.
Indeed, a major concern among economists has been
overheating of credit markets.
Second, in most key respects, the trading market continues
to perform very well. Bid/ask spreads and corporate bond
markets are 10 to 25 percent tighter compared to the lows prior
to the crisis. The price impact for trading blocks, another
good measure of trading costs of liquidity, are actually as
good or better than 2005, some of the lowest points of the pre-
crisis period.
Certainly, trade sizes are down somewhat, as is turnover.
This not clearly good or bad. Other market structure factors,
such as rising automation and increased DTF trading or greater
concentration on the buy and the sell sides may be at play.
Notably, we do not see price impacts.
In short, to sum up in the words of New York Fed President
Bill Dudley, ``There is limited evidence pointing to a
reduction in the average levels of liquidity.''
Some have expressed concern regarding what might happen
when markets are the next air patch. A hypothesis goes that a
liquidity crisis will result, but this is largely mistaken.
Dealers do not catch the falling knife. Instead, they respond
to similar incentives motivating other investors to sell.
Secondly, it is important not to confuse trading volumes
with liquidity. Liquidity is not a price guarantee. High
volumes in fact can lull market participants into believing
they can get out at any time, at any quantity, in any market
circumstance, without observing any price change. This is what
Paul Volcker calls the ``liquidity illusion.''
Not only is this dangerous, this is dangerous because it
diminishes investor responsibility and harms the ability for
the capital markets to efficiently allocate resources to the
real economy.
The changes put in place since the Dodd-Frank have made us
safer. So what should we do? We should do several things.
We should be increasing transparency. Just as the
introduction of the TRACE reporting system in 2002 brought
trading costs down significantly, enhanced reporting in the
Treasury markets, in tri-party and bilateral repo markets
relating to investor costs, as folks like Commissioner Piwowar
and Commissioner Stein of the SEC have all urged. These can
make significant improvements.
In particular, we also need to move faster to modernize
financial industry disclosures.
Also, it is important that we finish the job. The stronger
performance of the U.S. banking sector compared to the European
banking sector demonstrates the importance and value of U.S.
reforms.
The movie, ``The Big Short'' reminds us of the importance
of the provisions of Dodd-Frank that ban the very conflict-
ridden practices that corrupted our securities markets. The SEC
needs to finish them immediately and it needs to finish the job
on implementing CDS infrastructure swap market reforms.
I would also urge the committee not to adopt the bills
under consideration today. They are over-broad, unwise, and
unnecessary.
In short, what we simply need to do is move forward with
compliance, as Paul Volcker has said, for the good of the
country.
Thank you very much for the opportunity to speak before
this committee.
[The prepared statement of Mr. Green can be found on page
73 of the appendix.]
Chairman Garrett. And next we have Mr. Johns--welcome to
the panel as well. And you, too, are recognized now for 5
minutes.
STATEMENT OF RICHARD A. JOHNS, EXECUTIVE DIRECTOR, STRUCTURED
FINANCE INDUSTRY GROUP
Mr. Johns. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, my name is Richard Johns and I am
the executive director of the Structured Finance Industry Group
(SFIG).
Prior to SFIG, I spent over 22 years in the finance
industry, including as head of global capital markets at
Capital One, where I was responsible for all fixed income
funding before and during the financial crisis. I was global
head of funding and liquidity at Ally Financial after the
crisis.
Today, I am testifying on behalf of the 350 institutional
members representing all areas of the securitization industry,
including investors and issuers.
I will testify to a number of global regulatory issues that
affect lending across asset classes, including the definition
of high-quality liquid assets under the joint agency's
liquidity coverage ratio (LCR), international efforts to create
a high-quality securitization definition, BASEL capital rules,
and the fundamental review of a trading book.
First, beginning with the LCR, we believe the new LCR rules
are misguided in several areas. First, the LCR does not treat
any class of asset-backed securities as high-quality liquid
assets, essentially branding all ABS as illiquid. This blanket
exclusion is unwarranted. High-quality ABS are among the most
liquid assets that a bank can hold.
Before, during, and after the credit crisis, credit card
and auto ABS largely retained market access and performed
better than investment-grade corporate debt which was granted
HQLA status.
Second, the implementation of various Dodd-Frank
requirements have created significant changes in practice
across the entire securitization industry. If these changes are
deemed to have any value at all, then how can an ABS security,
previously deemed to have zero liquidity, still be deemed to
have zero liquidity after the implementation of Dodd-Frank?
Effectively, we are being told by our regulators that zero
plus something equals zero.
In Europe, a less-liquid market than the United States,
policymakers are actively recalibrating this potential over-
regulation and have identified high-quality criteria for asset
classes that they believe warrant preferential capital
treatment.
This concept has been extended to global securitization
through a similar initiative undertaken by Basel and IOSCO.
However, while the rest of the world moves forward, U.S.
regulators have shown no interest in following a similar
course.
If this continues unchecked, then European investors will
receive capital relief on local collateral and will be
incentivized to invest locally, leaving a risk of market
fragmentation, thereby reducing market liquidity.
If other countries implement IOSCO/Basel criteria, then all
global investors except U.S. investors will receive
preferential capital treatment, creating a risk of over-
reliance on non-U.S. funding in our capital markets and,
consequently, our economy.
Compound that with recent developments of Basel's
fundamental review of a trading book which sets capital
standards for broker-dealer inventory. A major driver behind
U.S. marketplace rebounding more quickly from a credit crisis
was the crucial role of the market maker, a role that simply
isn't replicated by any other country's capital market. They
did catch the falling knife.
Without bid/offer levels and inventory capabilities,
investors would not feel confident the securities they buy will
also be able to be sold.
Early indications suggest that capital may increase by up
to 50 percent, causing market marking to become uneconomical
and broker-dealers to potentially exit the market. Investors
are already concerned that this may cause illiquidity.
These unjustified increases in capital follow perhaps the
largest example of redundant capital created when the FAS 166/
167 accounting standards forced issuers to hold reserves
against losses, despite the contractual transfer of risk of
loss to investors.
Despite the fact that we know investors took losses during
the credit crisis, issuers are still required to hold reserves
against every dollar of risk transferred. Layer in the fact
that banks must also hold 10 percent regulatory capital against
that same risk creates a duplication and redundancy of capital
that, if corrected, could generate tens of billions of dollars
in lending to consumers and businesses in your districts.
Therefore, we recommend the following actions: require U.S.
regulators to examine the combined effects of regulations on
ABS liquidity; require U.S. regulators to work with
international regulators to develop a globally consistent
standard for high-quality securitization; designate high-
quality ABS and MBS as HQLA under the final LCR rules; re-
examine loan-loss reserve accounting to ensure that reserves
are only being held against actual contractual obligations; and
finally, support H.R. 4166, which our members, issuers, and
investors alike, believe creates a workable option for CLO risk
retention.
Thank you for the opportunity to testify. And I look
forward to your questions.
[The prepared statement of Mr. Johns can be found on page
85 of the appendix.]
Chairman Garrett. And I thank you for your testimony.
Dr. Stanley, welcome to the subcommittee, and you are now
recognized for 5 minutes.
STATEMENT OF MARCUS STANLEY, POLICY DIRECTOR, AMERICANS FOR
FINANCIAL REFORM
Mr. Stanley. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee.
My name is Marcus Stanley and I am the policy director of
Americans for Financial Reform.
The issues examined by the committee today, including
securitization market activities in bank trading books and
liquidity, go to the very heart of the 2008 financial crisis.
Indeed, a shorthand description of that crisis might read
irresponsible practices in securitization markets infected the
trading books of key dealer banks, leading to a catastrophic
failure of market liquidity.
It is therefore not surprising that the Dodd-Frank Act
targeted these areas for reform. Now some are calling these
reforms into question because of their supposed impacts on
market liquidity.
We oppose these efforts to roll back post-crisis reforms.
It is particularly ironic that they are being advanced in the
name of increasing liquidity.
A central lesson of the 2008 crisis is that market
liquidity can be excessive, the liquidity illusion that Mr.
Green referred to, and that such excessive liquidity leads to
disastrous market crashes that have far more damaging liquidity
effects than any that might be created by prudent limits on
excessive leverage and risk-taking in normal times.
Indeed, the financial crisis led most securitization
markets to essentially shut down to new issuance for a period
of years, an impact that dwarfs any marginal effect on such
markets that could emerge from Dodd-Frank reforms designed to
improve securitization quality.
There has been a great deal of speculation about changes in
liquidity due to regulation, but very little hard evidence.
Quantitative analyses have not found changes in liquidity that
appear economically meaningful.
Indeed, where such changes are seen, they often appear
positive, such as compression and spreads. There does appear to
have been some decline in average trade size, but changes in
trade size do not appear to have had an impact on investor
costs. And any impact on systemic risk is, at this point,
extremely hypothetical.
There has also been some increase in the frequency of brief
but disruptive flash crashes. These are probably due to the
growth in high-frequency, algorithmic electronic trading,
rather than to new financial regulations. Regulators should
address the risks of such electronic trading as a separate
matter.
Any changes in fixed income market liquidity also do not
appear to have blocked the--bond issuance over the past few
years has soared to levels well in excess of pre-crisis highs.
And returns to municipal bonds, in other words the costs of
borrowing from municipalities, are at 50-year lows.
Two bills before the committee today would fatally weaken
Dodd-Frank risk retention rules designed to improve asset
quality and securitization markets. These bills go far beyond
the sensible underwriting-based exemptions that regulators have
already placed in their final risk retention requirements.
H.R. 4166 and the CMBS discussion draft would enormously
increase the scope of exemptions and prevent regulators from
applying reasonable underwriting standards.
For example, H.R. 4166 apparently completely eliminates any
controls on leverage of the borrowing company receiving a
commercial loan as a requirement for CLO risk retention.
The CMBS discussion draft exempts interest-only loans from
risk retention requirements and provides a blanket exemption
for all single-loan securitizations regardless of underwriting
quality.
We urge the committee to reject this legislation and to
preserve the positive incentives created by risk retention
which would be fatally undermined by the over-broad exemptions
in these bills.
As laid out in my written testimony, AFR also has some
concerns with H.R. 4096 on Volcker Rule naming restrictions. As
the bill is currently drafted, it seems to leave open some
possibilities for naming practices that could create an
inappropriate inference of sponsorship.
We would oppose the bill as currently drafted, but are open
to work with the sponsors on potential changes to the bill.
My written testimony also discusses the importance of other
reforms, such as the fundamental review of the trading book.
The fundamental review of the trading book is directly aimed at
issues revealed by the financial crisis that permitted banks to
borrow excessively against assets in their trading books.
I would like to close with a piece of good news. Yesterday,
the FDIC announced that over 95 percent of American community
banks were profitable over the year 2015. This is up from just
78 percent in 2010, the year that the Dodd-Frank Act was
passed. This is just one example of what I believe are many
positive elements of our financial markets that have occurred
under Dodd-Frank.
Thank you, and I look forward to answering your questions.
[The prepared statement of Dr. Stanley can be found on page
158 of the appendix.]
Chairman Garrett. Great.
Mr. Plunkett, welcome to the panel, and you are recognized
now for 5 minutes.
STATEMENT OF JEFFREY PLUNKETT, EXECUTIVE VICE PRESIDENT AND
GLOBAL GENERAL COUNSEL, NATIXIS GLOBAL ASSET MANAGEMENT
Mr. Plunkett. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee.
My name is Jeff Plunkett, I am general counsel of Natixis
Global Asset Management. We are a wholly owned subsidiary of
Natixis, a French bank that operates a single branch office in
New York and does not accept FDIC-insured deposits.
Natixis and each of its affiliates, including each
investment manager affiliated with us, is, however, considered
a banking entity under the Volcker Rule.
Asset managers play an important role in the global
financial system. Through our clients' funds, we provide an
important source of capital formation and liquidity to markets
worldwide. We serve individual investors' retirement planning
by managing pension, 401(k), mutual fund, and personal
investments.
Innovative asset managers provide new products that help
individuals save for retirement. Asset managers affiliated with
banks also contribute a source of revenue that is not dependent
on the capital of the parent bank.
Each of our managers operates under its own historical name
and branding. And with only a couple of exceptions, none has
Natixis as part of its name or logo. Each of our U.S. managers
is also separately registered with and regulated by the SEC.
I am pleased to be here today and to have this opportunity
to discuss H.R. 4096, the Investor Clarity and Bank Parity Act.
H.R. 4096 would make a very limited modification to the Volcker
Rule.
The Volcker Rule, as noted by Ranking Member Maloney,
restricts the ability of banks and investment managers
affiliated with banks to sponsor hedge funds and private equity
funds. Investors in these funds are principally sophisticated
institutions, such as pension funds, that are trying to
diversity their investments and manage risk.
The Volcker Rule permits a banking entity to offer private
funds, subject to certain conditions, one of which is that the
fund may not share the same name or a variation of the name
with the banking entity that is managing the investments.
Unfortunately, this provision is at odds with both industry
practice and the goal of providing clarity to investors about
who is managing a fund.
In our experience, most private funds contain the name or a
variation of the name of the investment manager. Thus, a fund
managed by ABC investment manager might be called the ABC
private fund. This clearly distinguishes this private fund from
other funds managed by other investment managers.
This practice has been in place for many years. And in our
experience, investors in private funds prefer to see the name
of the fund manager in the name of the fund.
Under the Volcker Rule, our managers and other bank-
affiliated asset managers are now prohibited from using their
name to identify their own private funds. This puts them at
odds when investors desire full clarity and at a competitive
disadvantage with independent asset managers.
The situation is even more illogical when the bank-
affiliated managers have a name that is totally different from
their parent bank, as we and certain others do.
The primary purpose of the name-sharing prohibition is to
prevent investor confusion about who ultimately bears the risk
of loss. However, this risk is already addressed in a number of
ways in the Volcker Rule which requires that the banking entity
not guarantee the performance of the fund, disclose clearly to
investors that losses are borne solely by the investors and not
by the banking entity, and clearly disclose that ownership
interests in the fund are not insured by the FDIC.
These restrictions are more than sufficient to ensure that
funds sponsored by a banking entity are understood by investors
to be separate from their sponsor and their affiliated bank.
It is simply a quirk in the Volcker Rule that this applies
to separately branded investment managers.
We support H.R. 4096 because congressional action is the
only option to change the name-sharing prohibition. The
prohibition was one of the most heavily commented-upon aspects
of the Volcker Rule during its drafting, that the regulators
concluded that the legislation was clear and adopted the
restriction as proposed.
The regulators appreciated our belief that the Volcker Rule
was not intended to affect the naming of funds where the
investment managers' name did not link the manager to its
parent bank. They said that the text of the Volcker Rule did
not leave room for regulatory interpretation.
H.R. 4096 is a narrowly tailored piece of legislation that
will provide necessary relief without undermining the intent of
the Volcker Rule.
Mr. Chairman, we urge Congress to adopt H.R. 4096. Thank
you very much. I would be happy to answer questions.
[The prepared statement of Mr. Plunkett can be found on
page 111 of the appendix.]
Chairman Garrett. Thank you, sir.
Last, but not least, Mr. Renna, thank you for being on the
panel, and you are recognized for 5 minutes.
STATEMENT OF STEPHEN RENNA, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COMMERCIAL REAL ESTATE FINANCE COUNCIL
Mr. Renna. Thank you, Chairman Garrett, and Ranking Member
Maloney.
The Commercial Real Estate Finance Council, known as CREFC,
is the trade association for the $3.5 trillion commercial real
estate finance industry. Its 300 member companies include
lenders of all types, balance sheet and securitized, as well as
investors and servicing firms.
I am CREFC's president and CEO.
My testimony today will focus on the commercial mortgage-
backed securities, or CMBS, side of the commercial real estate
finance industry. This is the sector most affected by
regulations.
I do want to note that CMBS is completely distinct from
residential mortgage-backed securities (RMBS). Mrs. Maloney
referred to RMBS and the subprime loans that are well-known to
have been within that and the problems they created.
Under RMBS, mortgages are underwritten at the borrower
level. For CMBS, mortgages are underwritten at the asset level.
CMBS is about 25 percent of all commercial real estate
lending, about $100 billion per year. It expands the pool of
available loan capital beyond what balance sheet lenders, banks
and insurance companies can contribute to meet borrower demand.
There is $600 billion of outstanding CMBS debt, $200
billion of which will need to be refinanced in the next 2
years. Many of the borrowers are in secondary and tertiary
markets. CMBS financing may be the only or at least the most
cost-effective financing they can get.
By providing access to the public capital markets, CMBS
allows banks and other mortgage originators to free up their
balance sheets so they can recycle their limited capital into
new loans. It is efficient and de-concentrates risk that could
otherwise over-weight the balance sheets of banks as we saw
during the great recession.
Several regulatory agencies have been tasked with working
collaboratively on Dodd-Frank rulemaking. With such a daunting
task, it is no surprise that many aspects of the rules apply
broadly across asset types and lack specific correlation to the
varying characteristics of different types of assets in
sectors, such as CMBS.
The problem is that one-size-does-not-fit-all. To date,
CMBS is subject to Reg AB, Basel III and, of course, Dodd-Frank
risk retention and others. The sheer number of rules and their
breadth is contributing to retrenchment by banks and
illiquidity in the markets. In many cases, the regulatory
burden outweighs the potential benefit the regulators are
trying to achieve. Regulation is institutionalizing
inefficiencies.
Today, CMBS investors are demanding return premiums similar
to corporate junk bonds, yet property fundamentals are strong.
Property owners face the prospect of higher rates on loans,
tougher credit, and diminished property values as debt issuance
slows. Estimates for this year's CMBS issuance have been
downgraded from over $100 billion to $70 billion.
The market is becoming fragile, even before half of the
plan regulations come into effect. Illiquidity and volatility
are becoming the norm.
Why is the CMBS market suffering dysfunction? There are
many macro, external factors disrupting the capital markets.
But it is also clear that regulation has a role, too, and a big
one.
Regulators have concluded that securitized loans are more
risky than loans kept on balance sheet regardless of
underwriting, credit or capital. The regulatory cost to capital
they impose is simply based on the lending platform. This is a
flawed premise.
Because of this burden, CMBS is losing institutional
capacity, bank and mortgage originators are leaving or
substantially reducing their commitment to the market.
Once industry capacity shuts down, it takes a long time
before it returns. We saw that after the crisis in 2007. Loss
of capacity is problematic in the short run and dire in the
long run.
When we get to the point in the cycle where capital and
credit gets scarce, and we will, then the loss of CMBS capacity
will hit borrowers broadly and hard.
Additionally, CMBS bond investors typically are pension
funds and insurance companies. What hurts CMBS hurts
pensioneers and life insurance beneficiaries.
We urge Congress to provide modest relief from the risk
retention rules for one sector of CMBS known as the single-
asset, single-borrower market. This is embodied in Congressman
Hill's discussion draft, which we urge the committee to
support.
Single-asset, single-borrower is a securitization of a
single, large mortgage on one asset, such as a mall, hotel or
office building. Financing of these large, high-cost assets is
often beyond the scope of one lender. Therefore, it is more
efficient to use CMBS and, therefore, access the public capital
markets.
Investors invest enthusiastically in single-asset, single-
borrower securitizations because the assets perform extremely
well and are easy to analyze and underwrite. This is not a
multi-mortgage conduit transaction. The idea of risk retention
was to protect investors buying securitizations where you had
dozens of assets in a pool and it was hard for investors to
analyze what they were buying.
Nevertheless, regulators with a broad brush applied risk
retention to single-asset, single-borrower. This lacks
rationale and will do more harm than good.
Not only does this add cost to borrowers and reduce yield
to investors, it hampers the effectiveness of single-asset,
single-borrower. We urge the committee to support Mr. Hill's
discussion draft.
[The prepared statement of Mr. Renna can be found on page
116 of the appendix.]
Chairman Garrett. I thank the gentleman.
At this point, we will turn to questions, and I will
recognize myself for 5 minutes.
So, it has been a great discussion, with a great panel, and
I appreciate very much getting into the weeds on a fairly
complicated topic here. Let me bring it down to some simple
point of view as I look at it.
First, was there a problem to begin with? And second, has
the solution of Dodd-Frank caused any additional problems going
along?
So a similar question was there seems to be some different
views about this, about the performance of certain asset
classes during the last decade, and particularly the years
leading up to and around the financial crisis.
I will throw it out to Mr. Johns first and say, in a
nutshell, how did highly rated asset-backed securities perform
during the financial crisis relative to everything else out
there?
And then, I will go to Ms. Coffey.
Mr. Johns. During the financial crisis, I was at Capital
One, and we had, I would say, an auto and a card platform.
What I would say is that during the crisis, the loss
performance performed very much in line with expectations if
you are looking at prime auto, prime credit card, losses
tracked, unemployment up to a certain point in card space.
Losses in auto stayed relatively low. I would say prime auto,
generally less than 2 percent.
Chairman Garrett. Ms. Coffey, you touched upon this before,
but I just want to drive home the point.
Ms. Coffey. Absolutely. CLOs performed extraordinarily
well. In their 20-year history, the cumulative impairment rate
for CLOs was 1.5 percent. That 20-year history includes the
financial crisis, CDOs 45 percent, very different performance.
Chairman Garrett. Okay. This jibes with what Mr. Johns is
saying here as well. So we didn't really see a--although there
was a point by Dr. Stanley talking about excessive liquidity,
and I know you made reference to excessive liquidity leading to
the potentiality for excessive leverage.
But when I was listening to that--there is a saying, and I
had to remember what it is, ``Causation is not always
correlation.''
The gentleman from Maine is not here, but I heard about a
study once in the State of Maine where it said there was an
uptick in the divorce rate in the State, and at the same time,
there was an uptick in the use of margarine.
Now, you couldn't say in the case that there was a
causation by people using more margarine that was a causation
of the increase of divorce rates. I would just say that there
was not a causation, but maybe just a correlation.
So can anyone else address the issue? Is there a
correlation? Is there a problem, Mr. Renna, with a lot of
liquidity in the marketplace?
Mr. Renna. First, Chairman Garrett, to your question about,
was there a problem before, the CMBS industry needed to address
some issues within it and it did.
But I will say that bonds that were issued before the
crisis, on AAA bonds, there are no losses on those AAA bonds.
And single-asset, single-borrower securitizations had
absolutely no losses.
Chairman Garrett. So I guess the answer to the question is,
even though you had a lot of illiquidity during that period
leading up to that time, you did not see a problem.
So let us go to the second case. Now, we didn't see a
problem, but we had Dodd-Frank to have all these regulations in
there. The next question is, hey, is Dodd-Frank causing a
problem? We have heard a couple of people say no, there is no
problem in this marketplace. But that doesn't comport with what
we have heard from a couple of other people.
The Chair of the Fed came here in March and acknowledged in
testimony before this committee that, ``There is no question
that there are concerns about the liquidity in the fixed income
market.''
After her, we heard from Richard Ketchum from FINRA who
said that, ``There have been dramatic changes with respect to
the fixed income market in recent years, many of them coming in
reaction to the failures and the market impact coming out of
the crisis. This led to much higher capital requirements,
Volcker Rule,'' and he just goes on to agree basically, more
emphatically, with Chair White.
Mr. Carfang, I only have a few minutes. You say in your
testimony that, ``The combination of the Volcker Rule and
increased capital requirements results in financial
institutions scaling back their market-making activities. This
rule sets in wider bid/ask spreads and, ultimately, too, less
liquidity in the market.''
Is that true, what you said there?
Mr. Carfang. Absolutely, sir. In terms of putting this in
context, the macro statistics belie what is actually happening
in the economy. Yes, there are $1.5 trillion of new loans, but
they are going only to the largest and most creditworthy
borrowers and not the mainstream businesses or municipalities.
Chairman Garrett. And is it true, also as you said, that
there have been sporadic liquidity black holes in which when
the markets completely freeze up or prices gyrate wildly since
that time?
Mr. Carfang. Absolutely. We had the U.S. Treasury flash
crash about a year ago. And several other pockets where
securities could not be sold at any price, albeit for short
periods of time, but liquidity means it is there when you need
it.
Chairman Garrett. Sounds like a problem to me. Thank you.
I thank the panel.
At this time, I yield to the ranking member from New York,
Mrs. Maloney.
Mrs. Maloney. Thank you very much.
Mr. Green, some of the witnesses here today have argued
that the risk retention rule will raise the cost of credit and,
therefore, should be rolled back. Didn't the regulators
estimate that the risk retention rule would raise the cost of
credit modestly, but decide that these costs were worth the
benefits that the rule will provide?
For example, the Fed estimated that the rule would raise
the cost of a certain commercial mortgage-backed securities by,
most, one-quarter of 1 percent, but they determined that the
benefits--better quality loans and fewer defaults--would far
outweigh the costs.
Do you think the regulators were sensitive to the potential
impact that the risk retention rule would have on the cost of
credit when they were writing the rule? And in your opinion,
will the benefits of the rule outweigh the costs?
I would like your comments, and also Dr. Stanley's.
Mr. Green. Thank you very much, Ranking Member Maloney.
Absolutely, there are hundreds of pages of economic analysis
that went along with the rule, carefully analyzed, carefully
studied. And absolutely, the benefits far outweigh the costs.
These are common-sense solutions. We saw the terrible
originate-to-distribute model that was--it was because there
was not real risk retention that was transparently priced up
front at the beginning of the transaction.
Risk retention really is just a transparency tool to make
sure that the real risks of the loans are being repriced.
And to the point about the concerns that the chairman noted
earlier from Chairs White and Ketchum, really what we have been
seeing out there is that the data has shown the complete
opposite. And we are far more secure. The costs of illiquidity
from the financial crisis far outweighed any of the changes
that are being brought about today.
Mrs. Maloney. Okay, thank you.
Dr. Stanley, would you agree?
Mr. Stanley. Absolutely. I think that this goes to the
issue of excessive liquidity and its connection with financial
risk.
The financial system is healthiest when risks are properly
priced, which can sometimes mean that something is priced
higher because people have the correct expectations about the
potential market risks and credit risks that they are taking.
One thing that we learned in the financial crisis is it is
very clear that when people are set up to think that they are
making investments that have very low risks, and they suddenly
decide that these risks are much higher than they thought,
market chaos ensues, and we can see absolutely shutdowns of
markets.
And Mr. Johns mentioned that some of these securitizations
in the long run performed well in terms of people paying back
their loans and so on. Well, that wasn't understood at the
time.
And in fact, their market prices dropped very significantly
during the crisis, not just in mortgage-backed securities, but
in many other areas of securitizations as well. And that is why
we saw shutdowns in these securitization markets for such a
long period.
Mr. Johns. But what you are referencing there is an issue
of transparency.
Mrs. Maloney. Thank you.
My question now is to Mr. Plunkett. I have very limited
time.
You noted in your testimony that investors in hedge funds
and private equity funds are typically sophisticated,
professional investors. And I personally think that is very
important.
Do you think that sophisticated investors in a fund would
already know who initially--
Mr. Plunkett. Thank you. Yes, the institutional investors
will know as part of their diligence process. H.R. 4096 is just
trying to promote transparency and make it easier for everybody
to understand which manager is managing which fund.
Mrs. Maloney. And would you say, in your experience, does
having a fund you organized share a name with your investment
adviser really hold your feet to the fire?
Mr. Plunkett. Our managers, and throughout the asset
management industry, our managers try very hard to protect the
interests of their clients, no matter what happens. The Volcker
Rule prohibits, in any event, bailing out or guaranteeing
funds. So the name-sharing really doesn't change that.
Mrs. Maloney. So there are prohibitions, you would say, in
Dodd-Frank now that would pertain to your inability to bail out
a fund. In other words, could you bail out a fund under Dodd-
Frank? Even if you wanted to, you are prohibited from doing so,
aren't you?
Mr. Plunkett. Yes, we are.
Mrs. Maloney. Okay.
And Mr. Green, some Republicans on this committee have
argued that stronger regulation of the banking industry, and
particularly the Volcker Rule, are harming the liquidity and
our fixed income markets. Do you agree with that statement?
What is your response to that?
Mr. Green. Yes, it is just absolutely the data has proven--
the New York Fed has extensively studied, the New York Fed,
very close to Wall Street in terms of information, has
absolutely concluded the data is not there.
We see record-high corporate issuances, record-low costs of
capital. And bid/ask spreads and price impact for even large
block trades is tighter than ever.
Mrs. Maloney. Thank you very much. My time has expired.
Chairman Garrett. I thank the gentlelady.
The gentleman from Virginia is recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
I wanted to follow up on the chairman's line of
questioning, specifically as it relates to the corporate bond
market and the impact that post-crisis regulations, Dodd-Frank,
et cetera, have had and what many are very concerned about. And
Mr. Green has talked about that specifically.
I think it is interesting also that we have certainly had
witnesses who have testified before this committee, who have
just said basically, nothing to see here, let us move on when
it comes to this concern.
So I wanted to ask Mr. Carfang first, sort of following up
more particularly about the corporate bond market and the
liquidity concerns there, and if you could respond directly to
what Mr. Green has laid out in terms of whether or not we
should be concerned about this liquidity and specifically as it
relates to the things that you have laid out in your testimony
that suggest otherwise?
And then, I would like to hear from Mr. Plunkett on this as
well, when you are finished.
Mr. Carfang. Sure. Mr. Green's facts are correct, but his
conclusions are wrong.
Mr. Hurt. Explain that more.
Mr. Carfang. We have a Federal Reserve that has inflated
its own balance sheet from $1 trillion to $4 trillion over the
course of the financial crisis. That completely disrupts the
financial markets in a way that reduces interest rates.
So when Mr. Green says borrowing costs are at an all-time
low, well, yes, but that is Fed-induced, not market-induced.
When the Fed unwinds its balance sheet, frankly no one
knows. And that is going to be another chemical put into the
experiment.
Our clients, particularly those who don't have the highest
credit rating, are having difficulty raising cash, or raising
cash at rates that make sense for them to create jobs and
expand their businesses. That is true for our corporate
clients, and that is true for municipalities and State
governments as well.
Mr. Hurt. Do you think that if the Federal Reserve raises
rates in the future, it will exacerbate this problem? And where
does systemic risk fit into all of this?
Mr. Carfang. I am not sure that it will exacerbate the
problem. I think if the Fed allows rates to settle where they
would naturally settle in the marketplace, we would have the
most optimal results.
Mr. Hurt. Okay.
Mr. Plunkett, I'd love to get your thoughts on this.
Mr. Plunkett. I am not prepared to speak in any detail on
this subject, but we do hear from our asset management firms
that the liquidity in the fixed income market has certainly
changed, and not for the better.
The one point I might add is that when we talk about the
number, the amount of corporate bond issuances, it might be
linked to the fact that investors are searching for yield and
it is a zero interest rate environment. So people are certainly
going to, companies are certainly going to go out and tap that
zero interest rate environment as much as they can.
Mr. Hurt. Excellent.
Mr. Johns. There is one thing I might just sort of add,
too.
Mr. Hurt. Mr. Johns, please?
Mr. Johns. I don't know if the corporate bond market is the
right place to have our focus here. If we are looking at the
impacts of Basel, that is not the corporate bond market. You
need to be looking at the financial industry, the
securitization industry, and anything that is impacted from a
banking regulation perspective.
I could be a pharmaceutical company issuing corporate
bonds. I don't know how Dodd-Frank and how Basel regulations
necessarily are going to impact that.
So it may be true that there is more issuance in corporate
bond space and that may ultimately create some element of
corporations being able to fund themselves.
But if you are looking at the main mechanism of delivering
funding to the real economy, look to the financial sector,
which is not necessarily the same thing as the corporate bond
market.
Mr. Hurt. Mr. Renna or Ms. Coffey, do you have anything to
add?
Ms. Coffey. The one thing I would add to that is we are
talking about interest rates being at all-time lows for
companies.
It is important to remember interest rates are comprised of
two components, the base rate, the Treasury rate, or LIBOR,
which Fed monetary policy has reduced very substantially, and
it is also composed of the spread. The spread over those base
rates is extraordinarily high right now and that is something
that we do need to bear in mind.
Mr. Hurt. Thank you.
Mr. Chairman, I yield back my time.
Chairman Garrett. The gentleman yields back.
Mr. Hinojosa is recognized for 5 minutes.
Mr. Hinojosa. Thank you, Chairman Garrett and Ranking
Member Maloney, for holding this timely hearing.
I also wish to thank our distinguished panel of witnesses
for their appearance and testimony today.
Although more than 7 years have passed since the height of
the financial crisis, we continue to feel its aftershocks
reverberating through our economy and financial system.
We have seen troubling episodes of increased volatility and
less liquidity in our markets. So as we examine the health of
our capital markets, we should take a good look at not only the
possibility of intended consequences of regulations, but also
look at how the fundamental structure of our markets have
changed.
A myriad of factors are contributing to this volatility.
And we should be wary of claims that regulations are not having
any effect.
Moving forward, we need to ensure that our legislative
efforts provide for a vibrant market without undermining the
safety and soundness of our financial system.
My first question is to Mr. Stanley. According to the bond
market liquidity reports issued quarterly by the Fed, the FDIC,
the OCC, the CFTC, and the SEC, liquidity in both primary and
second markets remains strong. However, we have had several
episodes of market volatility and signs that the market depth
has shallowed in the bond market.
Do you think our bond markets are healthy and would remain
resilient in the face of market stress? If so, please explain.
Mr. Stanley. There are these concerns, as you say, that,
and this relates to this issue of smaller trade sizes that I
mentioned, that the higher capital ratios on the big dealers
have made markets shallower.
I think that at this point, these concerns are very
hypothetical. I don't think that they have been proved out in
terms of anything that has actually been seen in the financial
markets. It is the regulators' job to worry about these
possibilities in the future.
I think that the gains that we get by ensuring that the
major dealers are at the center of the system are well-
capitalized and don't borrow excessively are much greater than
any potential slight increase in spreads that could occur from
shallower markets.
One thing that we saw in the crisis clearly was that when
those dealers are over-leveraged and when they are impacted,
when they have to engage in fire sales and prices drop, that
the negative impacts are just absolutely enormous. And it is
crucial to protect against that.
Mr. Hinojosa. Mr. Stanley, if that is so, have the
regulatory changes made by Dodd-Frank negatively impacted the
bond market liquidity?
Mr. Stanley. I don't believe that they have. People point
to a drop in bond market inventories at the major dealers are
somehow being problematic. But as I say, I think that these
make these dealers--first of all, I think that those changes
emerged coming out of the crisis. They predate Dodd-Frank.
And I think that to the degree those changes are because
the major dealers actually have to hold real capital against
their balance sheets as opposed to borrowing, I think they make
the markets more stable and durable.
Mr. Johns. That is not something that we have seen
evidenced by the market. I would say that at crisis and
immediately post-crisis, you might have had a dozen dealers
that had the capacity to take maybe a billion dollars down onto
their balance sheet. Now, maybe that number is three.
You are seeing inventory go down. I think Steve and
Meredith and, sort of, Anthony, just commented on this. RMBS,
CMBS, dealer inventories are down about 50 percent in the last
2 years.
So, we are seeing something. This is not hypothetical.
Mr. Hinojosa. Let me hear from Mr. Green.
In your testimony, you mentioned that the electronification
of the bond markets in the past have been dominated by the
large bank dealers and that is changing the characteristics of
those markets.
To what extent did Dodd-Frank and Basel capital
requirements interplay with the increasing effects of the
markets?
Mr. Green. I think that there are important technological
changes going on in the markets. We are seeing increased
electronification, especially in the Treasury markets. That is
a function of changing technology, and frankly is not a
function of regulation.
And frankly, it is something that folks on both sides of
the aisle have seen offers potential for good, folks like
former SEC Commissioner Dan Gallagher has called for great
electronic trading of bonds. So, it is not a problem; it is
something that the regulators need to pay attention to.
If I can just briefly respond to the point about
inventories, inventories were at their height in the run-up to
a during the financial crisis, and that resulted in massive
losses in failures to the largest financial institutions around
the world.
The decline in inventories and the increase in capital
means that dealers are actually now positioned to take on
inventories when it makes economic sense, when the market-
making makes sense and so that they are capitalized to absorb
the risks that they are going to take. That is what we mean
by--
Mr. Johns. That is simply not true.
Chairman Garrett. Time has expired.
Mr. Johns. That is simply not true. That is not--cause-and-
effect don't work that way. It is not that they have now
positioned themselves deliberately because of the capital they
are holding. That is not how capital works.
They have dropped their inventory because of the fact that
they have these capital charges associated with their inventory
positions.
Chairman Garrett. Thank you.
Mr. Hinojosa. I yield back.
Chairman Garrett. Thank you.
Mr. Duffy is recognized for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
Mr. Carfang, what role did profit trading have in the
financial crisis?
Mr. Carfang. Banks trade for their own portfolios and they
do that primarily to accommodate their customer activity as
well as profit themselves.
Mr. Duffy. Was it a root cause of the financial crisis?
Mr. Carfang. Absolutely not.
Mr. Duffy. I would agree.
So would you agree that the Volcker Rule caused a reduction
of providers and sources of liquidity in fixed income
securities?
Mr. Carfang. Right. I believe the Volcker Rule has caused
less trading and, therefore, wider spreads.
Mr. Duffy. And so now, where does that new liquidity come
from?
Mr. Carfang. The liquidity comes from banks and it comes
from other participants in the capital market.
Mr. Duffy. Maybe this is to Ms. Coffey, as well. Do either
of you see any additional downside risk with these new
liquidity providers at times of market stress?
Ms. Coffey. Absolutely. One of the things that you need to
think about is, do you have two-way liquidity or do you have
one-way liquidity?
What is very important with market makers is that they
provide two-way liquidity. They will buy and they will sell.
When you have many market participants, they might all be
buying or all be selling at the same time and that is something
very important to bear in mind.
Mr. Duffy. Okay.
And Mr. Carfang, I think you made an interesting point in
regard to the high school chemistry set. You might see one
potion or powder and how that behaves in its vial by itself,
but when you put all three vials together, we actually don't
know what happens.
So if you look at risk retention, Basel and Volcker, do we
actually know the consequence on our markets with these three
combined?
Mr. Carfang. What we are seeing with these three combined
is those institutions of the absolutely highest quality have
liquidity, they have low spreads, they have inventories, and
they have traders in their securities, but everyone else is
being crowded out.
Mr. Duffy. Yes.
Mr. Carfang. All but the highest-quality borrowers have
access now.
We see--Basel III is what we refer to as being procyclical,
so when things are fine, the markets are not in stress, there
is plenty of capital, there are low rates, low spreads, but in
times of stress, Basel III actually requires banks to hold more
liquidity, more Treasury bills. And--crisis when we do have
markets in greater stress.
We don't know, we haven't seen how the markets and how this
chemical reaction is going to take place when you add financial
stress, you add the Fed unwind and a number of unknowns that
are still playing out.
Mr. Duffy. Have we seen any warning signs when we look back
to October or to August of this past year when we have any
market stress and what happens to liquidity?
Mr. Carfang. We had the Treasury flash crash, but we are
also seeing pockets of illiquidity in the municipal bond market
from time to time. And we are seeing trading gaps because of
very high volatility. Big fluctuations in price are the result
of low inventories and wide spreads.
Mr. Duffy. So you guys are all aware of Lord Hill, Jonathan
Hill from the EU, and they have actually taken a pause or
recommended a pause in the EU because I think there is an
understanding that we don't know, like your chemistry set, the
consequences on our markets, our economy, on our growth that
all of these rules are going to have on one another.
Is there something that we know on why all these rules are
going to work that the Europeans don't know? Is there something
they know that we don't know?
Mr. Carfang. In the early part of the decade after the
crisis, there was a regulatory arms race. Other central banks
are taking a pause; we are not.
Many of the regulations are actually improving the safety
and soundness of the system. I am not here to advocate against,
that these regulations be ripped apart.
But it is that chemical reaction, that we haven't taken a
deep breath and we haven't stepped back to understand what all
these unintended consequences are.
When a municipality can't sell a note to a money market
fund to meet a payroll, that is a problem.
Mr. Duffy. Ms. Coffey, would you agree that we don't know
the consequence in times of market stress as to how all of
these rules are going to impact on markets?
Ms. Coffey. Absolutely. I would say there are more than
three chemicals and I certainly hope nobody blows up the
school.
[laughter]
Mr. Duffy. Is it possible the school gets blown up here?
Ms. Coffey. I certainly hope not. But I think there are
definitely questions that when you start layering all these
different factors on top of each other, nobody knows how it
turns out.
Mr. Carfang. At the margin, behavior changes. And yes,
there will be a school that is not built. There will be a
hospital that is not built.
Mr. Duffy. Very quickly, did mortgage-backed securities
have anything to do with the crisis? Did that have anything to
do with Dodd-Frank? And does anyone know if there was any
reform to Fannie Mae and Freddie Mac in regard to--
Chairman Garrett. Quick answer.
Mr. Renna. Residential mortgage-backed securities were at
the heart of the crisis, Congressman.
Mr. Duffy. And were Fannie and Freddie part of our
mortgage-backed securities?
Mr. Renna. Certainly, they were encouraging a lot of
federally-guaranteed mortgages.
Mr. Duffy. And was there any reform to Fannie and Freddie
in Dodd-Frank, do you know?
Mr. Renna. No, there was not.
Mr. Duffy. I yield back.
Chairman Garrett. Okay, I will.
Mr. Stanley. Can I just jump in on the question as to--
Chairman Garrett. No, I am going to try to keep it even,
and give the gentleman from California another 20 seconds, too,
on the end of his, so we stay. But thank you.
The gentleman from California is up for 5 minutes.
Mr. Sherman. I thank the chairman and the ranking member
for having these hearings because there is far more money
involved in the bond market than the stock market. And whether
American businesses can provide jobs and expand depends I
think, a lot more on the fixed income or debt instruments.
What is missing from the panel is the bond rating agencies
which, I think, are almost entirely responsible for the 2008
collapse. They gave AAA to Alt-A.
I have talked to people who put together mutual fund
portfolios. And they say, how can I not have the highest yield
with the highest rating? If I turn down a AAA-rated security
that pays five basis points more than some other AA-rated
security that I think is more sound, then people look at the
portfolio and they just say I have five basis points less.
Who is going to invest in a mutual fund that pays five
basis points less?
So the credit rating agencies are the only way for the
individual investor to evaluate a portfolio. I have had people
in this room so desperate to defend the credit rating agencies
that they say in valuing a bond portfolio, don't pay attention
to the credit rating. These, of course, are the credit rating
agencies whose last refuge is to say, don't pay attention to
what we say because you know we have been paid to say it.
I would not attend a baseball game if the umpire was
selected and paid by one of the teams.
But we have covered in this the credit risk that individual
investors face and risk retention may focus on that. We haven't
talked at all about the interest rate risk.
We have lived so long in a zero inflation world or 2
percent inflation world that we have forgotten the 1980s.
Retired people are stressed by the low nominal rates they
are getting. And at 8 percent, if they were getting 8 percent
on their money in a 6 percent inflation world, they would be
happy. They would be eroding their capital by 6 percent a year,
but they wouldn't notice. They live in a nominal world; the
people in this room live with real interest rates.
But now they are getting 2 percent in a zero percent
inflation world, or 3 percent or a 1 percent inflation world,
and they are desperate to get a higher nominal rate, and they
are playing with high-risk yield. And they may be driven to
take credit risks, but they also may be driven to go out longer
and take a bigger credit risk.
Let me ask Mr. Johns, is there a market for, and are people
issuing, other than TIPS, inflation-adjusted debt securities
for people to buy, other than the Federal Government's TIPS
program?
Mr. Johns. From a securitization perspective, I am not
aware of anything.
Mr. Sherman. Okay.
Ms. Coffey?
Ms. Coffey. I would note that non-investment-grade loans
are actually tied to a 3-month LIBOR; therefore, they are
floating rate and are not--
Mr. Sherman. I missed the first part of your answer. What
is the type?
Ms. Coffey. Non-investment-grade loans, the loans that
finance companies like Cable Vision and Dunkin Donuts, are
floating rate instruments--
Mr. Sherman. They are regarded as high risk because you are
not sure Dunkin Donuts is going to sell enough donuts, and yet
the 30-year Treasury may be the thing that loses half your
money for you. Because if we live in--I haven't done the
calculations, but if we go to 10 percent inflation, I assume
the 30-year Treasury loses, what, about half its value?
So you can lose half your money on a Treasury, and it may
be safer to buy the donuts.
Ms. Coffey. Certainly if I am the consumer of the donuts.
Mr. Sherman. Is anyone else on the panel aware of floating
rate instruments and/or inflation adjusted instruments?
We should talk about my mother's portfolio.
What is being done to--are we doing enough to warn
individual investors about the interest rate and inflation
risk?
Mr. Green?
Mr. Green. If I could add on that, I think that
transparency is the key here. In 2002, FINRA introduced the
TRACE reporting system, which brought down costs significantly
in the fixed income markets.
There is a lot more we can do. There are proposals out
there that are expected to move forward regarding--
Mr. Sherman. Do any of their proposals account for the fact
that in an absolutely transparent 30-year Treasury bond that
everybody thinks is super secure, you can lose half your money
if there is a change in the inflation rate? What can we do to
warn people more of that interest rate risk? Because they live
in a world where they think the 30-year Treasury is really safe
and the donuts aren't.
Is there anything else we can do to warn people of the
interest rate risk?
Mr. Green. I would absolutely agree that there is more.
Mr. Sherman. What do we do?
Mr. Green. We need to increase the disclosures and the
financial education. There is a lot more that the investment
advisers--
Mr. Sherman. There is no risk statement on the 30-year
Treasury.
I yield back.
Mr. Hurt [presiding]. Thank you, Mr. Sherman.
The Chair now recognizes Mrs. Wagner for 5 minutes.
Mrs. Wagner. Thank you, Mr. Chairman.
Thank you all for joining us today to discuss some
important regulatory issues facing our fixed income markets,
which are vital for keeping the cost of credit down for
consumers and for businesses.
In addition, if and when, as we are discussing, the Federal
Reserve continues to raise interest rates beyond what they did
in December, that will apply further pressure on this market,
which will require a strong framework and measures to ensure
that there is enough liquidity to continue trading these
securities.
As we have already seen, Dodd-Frank has greatly weakened
the ability of participants to react to market events, from the
Volcker Rule to new risk retention provisions that will go into
effect later this year.
Ms. Coffey, while the financial crisis was largely a
result, as we have discussed, of non-performing loans in the
residential mortgage space, how did the loans that this risk
retention rule target fare during the financial crisis?
Ms. Coffey. Certainly. One of the things to bear in mind
with these non-investment-grade loans is that they are senior-
secured. So first of all, the companies tend to perform very
well and worked through the financial crisis well.
And secondly, even if a few of the companies did default,
the recovery, given default, was extraordinarily high, more
than 80 cents on the dollar.
As a result, investments that invested in these structures,
like CLOs, performed extraordinarily well, had de minimis
default rates, even lower default rates than we saw on
investment-grade corporate bonds, for example.
Mrs. Wagner. They performed extraordinarily well, yet the
risk retention rules don't seem to acknowledge the fact that
these securities performed extraordinarily well, which, as you
noted in your testimony, helped finance more than 1,200
companies that employ more than 6 million people.
Why is that?
Ms. Coffey. So why did it not--why does risk retention
particularly hit CLOs?
Mrs. Wagner. Yes.
Ms. Coffey. I think in part it is because of the bad
acronym. People see CLOs, they think CDOs, and they don't take
the time to separate out that CLOs actually provide financing
to American companies. I think that is the big difference.
We spend a lot of time talking to the agencies and speaking
with lawmakers about structuring a way to have risk retention
that fully comports with the Dodd-Frank Act, but that would
still permit CLOs to continue to survive, and that is in H.R.
4166.
Mrs. Wagner. Right.
Ms. Coffey. We think that is a good solution.
Mrs. Wagner. Great.
All right, Mr. Johns, despite the past performance and
strong fundamentals of many of these loans, our regulators
categorically decided that any asset-based security does not
qualify as a high-quality liquid asset. Why is this the case?
Mr. Johns. I think it is an over-exuberance of regulation
in the short basis. I think it is a failure just to recognize
that while we represent issuers and investors, some investors
are obviously in favor of risk retention, issuers fear the
capital burden as a sort of ebb and flow and push and pull of
opinion there.
But what is clear to me is that from these changes, whether
it is Dodd-Frank or the changes that you see in Europe that are
very similar to Dodd-Frank in securities land, there are some
positives that have come out of here.
You have risk retention, you have increased disclosure. You
have changes to the rating agency process. There are a lot of
things that, whether you agree with the degree of it or not,
some good has come out of it.
So what I can't understand is why if you are Basel, or if
you are one of the joint agency regulators, why you are not
rewarding good behavior.
I think the reference to insurance was put out earlier
today. Think of capital like insurance. Your insurance premiums
go down if you are a good driver. So if you are putting in
place aspects to your program that actually make it a safer
product for investors, that make it more transparent, that
there is increased risk retention, whether you agree with the
risk retention or not, at least reward that behavior by making
sure that it is treated as liquid.
I am hearing these guys saying here that we don't have a
liquidity problem. Well, if we don't have a liquidity problem,
why on earth can't we treat these as liquid assets?
It makes absolutely no sense to me how the two gentleman to
my right and left here are telling me something that I am
actually saying, yes, we have an issue with liquidity with the
capital, but the actual liquidity in the nature of the asset
itself should be rewarded.
Mrs. Wagner. Mr. Johns, just in my limited time, I have to
close, what are the real-world consequences of reduced
liquidity in the corporate bond market for U.S. companies,
their employees, and individuals saving for retirement or to
send their kids to college? Why does this matter? Quickly.
Mr. Johns. Ultimately, it means that money is not being
lent to folks who need to deliver that money to the real
economy.
Mr. Hurt. Thank you.
Mrs. Wagner. I appreciate it.
Mr. Hurt. The gentlelady's time has expired.
The Chair now recognizes Mr. Lynch for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
I thank the ranking member--and the panel this morning.
Let me take the small problem I have.
And Mr. Plunkett, you have this naming problem that seems
to be uniquely affecting Natixis and nobody else. Can I ask
you, have you tried to resolve this in a regulatory setting or
administratively? Or do you think that legislation is required?
Mr. Plunkett. Thank you, Representative Lynch.
We have talked to the regulators about it and they were
very clear. We even submitted a formal request for guidance in
our particular situation. And they were very clear that they
felt that there was no flexibility in the Volcker Rule
legislation for them to regulate.
Mr. Lynch. Okay, okay. I am good, okay. I agree with you,
and maybe we can fix that in one of the bills coming up.
Let me ask you, Mr. Stanley and Mr. Green, there is rather
a benign view of CLOs this morning. I was here during the
crisis, and even though the 10-year average might be good,
during that stress period, we had some problems.
The fact that the taxpayers pumped $970 billion into the
markets and we created a commercial paper facility and did all
these things to kind of prop things up, did that have anything
to do with the relatively better performance of CLOs?
Mr. Stanley. Absolutely. There was trillions of dollars of
public liquidity support into the market during the crisis. So
you can talk about the relative performance of different
assets, but I don't think that you can say that any asset is
totally healthy on its own without that kind of support.
And I would just also say that the CLO market was very
different in 2007 than it is today. In 2007, less than 30
percent of CLO loans were what is called ``covenant light,''
which is more dangerous in terms of paying back. Now, over 70
percent are.
And we have seen enormous increases in the issuance of CLOs
in the reach for yield environment created by low interest
rates. We have seen very compressed spreads on these high-yield
loans.
So I would ask the other panelists here, would you feel
more comfortable if our banks were loaded up with these CLOs
that are currently dropping in value in the market? As the Fed
started to raise interest rates, would you feel more
comfortable about the state of the financial system?
Mr. Lynch. That will have to be a rhetorical question
because you will take all my time.
Mr. Green, anything else to add?
Mr. Green. I would add that the leverage loan market was
the corporate--the last financial crisis, the corporate
performance was not at the heart of it, but if we look around
the world there are a range of financial crises, look at Japan,
where corporate loans drove failure there.
So we have to be on guard for the whole range of these
things and that is where regulators have been calling out the
leverage loan market which is what is a lot of--
Mr. Lynch. Let me drill down on it a little bit more.
At the core of the failure, though, was the issue of
securitization for distribution where folks could just pump out
these securities and escape any type of skin in the game or any
type of negative consequences of pushing them out in the
market.
H.R. 4166, the new bill here that is being pushed with
respect to--H.R. 4166 suggests that for a hundred million
dollar issuance, there would only be $400,000 of negative
consequence to the issuer. Now, isn't that a furtherance of
sort of no skin in the game, just pushing? That is the stuff
that got us in trouble in the first place.
Mr. Stanley. Absolutely. I think it just totally undoes the
positive incentive effects that were intended to be created by
risk retention.
And if you look at the CLO market right now, there was a
recent JPMorgan study which found that over half of the
mezzanine-level tranches of CLOs--this is not the equity; this
is mezzanine-level tranches--were showing mark-to-market
losses. And that is an increase from less than 1 percent in
September 2015.
So this is a market that is under stress. It can show
losses. We need to have the right incentives there.
Mr. Green. And if I can add to that?
Mr. Lynch. Sure, please.
Mr. Green. What we see in Europe with Lord Hill hitting a
pause on better capital performance with a simple transparent
comparable work they are doing there, it is actually not
necessarily leading to better results. We see European banks
taking a bloodbath on their stocks. U.S. firms are holding up
because of the strength of our regulation.
Mr. Johns. STC hasn't been implemented in Europe, so it is
irrelevant.
Mr. Lynch. Reclaiming my time, please, I yield back. Thank
you.
Mr. Hurt. The Chair now recognizes Mr. Poliquin for 5
minutes.
Mr. Poliquin. Thank you very much, Mr. Chairman. I
appreciate it.
And thank you all very much for coming here today. This is
a really important education for a lot of us.
Everybody in government should do everything humanly
possible to help our companies grow, whether here in Washington
or in the State or the local government. Right? We are all here
to help.
And when you have companies that are able to grow and hire
more workers and pay their workers more money, you have less
people dependent on the government.
I come from Maine. You know, we are pretty tough and
resilient up there. And I mean the real Maine, western,
northern, central and down east Maine, not northern
Massachusetts. I mean the real Maine. And we like to consider
ourselves independent.
So I am looking at this whole problem of liquidity and
volatility in the financial markets, in particular the fixed
income market, and when you have lots of volatility and wide
price swings, probably brought on or arguably brought on by a
lack of liquidity in the market because of these smothering
financial regulations, there are two things.
First of all, companies who decide to access the capital
markets to borrow by selling bonds so they can grow and hire
more workers instead of borrowing from a bank or a credit
union, well, they have less opportunity to do that, so there is
less opportunity to grow and for our economy to grow.
And also for our seniors, who are using fixed income
investments as a stability against an equity portfolio, they
get discouraged also.
So my question to you is the following, and Mr. Carfang, I
would like to address this to you. I am looking at FSOC. This
is a group of regulators, some of the biggest, heaviest, most
in-the-weeds regulators we have in the world are on this board.
And they pick apart all the different players in the asset
management space, all the different players in the insurance
space. And they say, are these folks too-big-to-fail?
I came from the money management business. And I will tell
you, if you and I are competing, and you are managing pension
funds and I am managing pension funds, and my performance is
better than yours, then your clients are going to come to me.
And if you get in trouble, you represent absolutely no systemic
risk to the market because the assets are held at a custodian
bank; we are agents.
What systemic risk do we provide--now, I am looking at this
whole thing that FSOC is doing. Why in the world should they be
spending their time looking at fixed income market risk? When
you have less liquidity in the fixed income market, isn't that
systemically risky to the economy, into the financial markets
and our ability to grow as a country and provide more
opportunities for people? What do you think of that, sir?
Mr. Carfang. I think the FSOC actually creates double
jeopardy and creates a culture of indecision on the part of our
financial institutions and the investors.
Financial institutions are not only subject to their
specific regulators, but should FSOC not like the outcome that
the regulator has, they have a second bite at the apple. And
that absolutely slows down our creativity, it slows down
economic activity, and job creation.
To me, the FSOC is probably one of the most serious
problems that we have in the sense that they are overreaching
now into asset management and things that have absolutely
nothing to do with truly systemic risk.
Mr. Poliquin. Why doesn't the SEC focus on that? The SEC
has been overseeing asset managers for 80 years. They do a
pretty good job, don't they?
Mr. Carfang. They have a tremendous track record. The SEC
in fact was working on money market fund regulation that I
spoke to in my testimony and was ultimately sort of strong-
armed by FSOC into coming up with the regulations that are now
damaging the tax-exempt and prime markets.
Mr. Poliquin. Thank you, Mr. Carfang.
I think this is an example of big, heavy, intrusive
government, the Administration's financial regulations that are
smothering.
We are the envy of the world. We have the best capital
markets in the world, most diverse, most liquid, deepest. Why
do we want to destroy that?
I would like to move on, if I can, to you, Mr. Plunkett.
And I want to make sure I understand this.
You were mentioning H.R. 4096. Now, you folks, your
organization, Natixis--am I pronouncing it correctly?
Mr. Plunkett. Yes.
Mr. Poliquin. Natixis. I am pretty close, I am from Maine
so we do the best we can, unlike the folks from New Jersey.
But in any event, you are a French bank or your holding
company is a French bank, and you own asset managers here in
America, including Loomis Sayles, I believe.
Mr. Plunkett. That is right.
Mr. Poliquin. That has been around forever, right? So I am
an investor, and I am a retired auto mechanic from Bangor,
Maine, my wife's a nurse, and we are putting aside 50 bucks a
week or a month to save for our retirement. And we want to hire
Loomis Sayles.
Shouldn't I want all the information humanly possible to
know that the brand, the name and the company that I am hiring,
I have all that information?
Now, talk to me a little bit about the naming problem here
that H.R. 4096 is trying to correct.
Mr. Plunkett. 4096 is trying to simplify the communications
between the manager and the end investor and make it really
clear from the beginning which manager is managing which fund.
It is just trying to simplify and make more transparent.
Mr. Poliquin. And that is really important, right? Okay.
Thank you very much.
Thank you, Mr. Chairman.
Mr. Hurt. The gentleman's time has expired.
The Chair now recognizes Mr. Hill for 5 minutes.
Mr. Hill. Thank you, Mr. Vice Chairman. I appreciate the
topic of this hearing.
We are here because we keep having testimony on monetary
policy in this committee, and yet all of our regulators, when
we talk about monetary policy, we are at zero and we still have
an economy that is sub par and not growing and capital is not
being allocated.
So I am glad we have a hearing today that talks about non-
monetary policy's structural impediments to economic growth,
which is what I think the topic is today.
We want to encourage private capital flows into
institutional, corporate-grade, commercial real estate. These
products are for institutional investors. And I think that is
something that all of the members of the committee understand.
We are talking about institutional products here, not
products being marketed to retail investors.
And secondly, my view in looking at the proposed rules on
commercial mortgage-backed securities, private capital flows
will be severely curtailed under the proposed regulatory rules
that are being considered, and they are on top of the existing
portfolio and Basel capital rules that our panel has talked
about.
Also, when I look at this topic, the regulators' proposals
for residential mortgage-backed securities are generous, and
yet they were at the heart of the crisis.
And yet in the qualified approach to residential mortgages,
85 percent would qualify. But for commercial mortgage-backed
securities, around which there was no demonstrated contribution
to the crisis, these proposed rules will only have 3 to 8
percent of the market qualify. And that is back-testing from
1997 through 2013 or so. So that has to raise concerns that we
are hurting private capital flows and that we are not being
fair and balanced as it relates to the commercial market.
If you look at default rates, which to me is the stress
test, who needs a stress test when we have been through the
market that we have been through? So we have it, we have the
data.
And on the subject of single-asset, single-borrower
securities, which is partially addressed in my draft, they only
had 25 basis points as a historical loss ratio over that back-
testing period.
And if you include even 2007, which was the worst year, it
was 1.77 percent as a default rate, which still, in the great
scheme of life if you are in the real world, not the academic
world, is a pretty good default rate.
I also read in the Democratic comments in the packet today
that somehow people are concerned about cross-
collateralization, that somehow that is a bad thing.
I can tell you, as a banker for 35 years that is a dream
thing, that is a good thing to have a single-asset, single-
borrower entity that is cross-collateralized because it
actually is in the creditor's favor and reduces the possibility
of collapse of that asset category, not enhances it as argued
in a memorandum from the opposition.
And then finally, I am curious about the proposed rules for
commercial mortgage exceptions, that they are just--I don't
know how they came up with these rules.
Some of the parameters that we talk about in my draft might
be appropriate in a community bank loan to an individual
borrower, but they don't reflect the institutional market for
commercial mortgage transactions, and so they don't seem to be
well-placed. And I am sure we will have more conversation about
that.
But I would like to ask a question of--insert itself in
this setting the rules, if you will, in trying to determine
this qualified rulemaking. Because this has been going on for 2
years. And I am trying to explain what interaction you have had
with our regulators, what data you have provided them. Could
you give us a snapshot of that, please?
Mr. Renna. Absolutely. Thank you, Congressman. You did a
terrific job summarizing what is going on in the CMBS industry.
With respect to why we are here asking Congress to
intervene is that, one, as I said in my opening statement, we
acknowledge the daunting task that regulators had to administer
Dodd-Frank and particularly with respect to risk retention.
They told us we would love one broad-based, elegant rule that
applied to all asset classes. That would be the simplest way to
do it.
Unfortunately, the world is not a simple place. There are
many different types of asset-backed securities, CMBS is just
one of them. They all have their own characteristics.
What we tried to demonstrate to the regulators is that the
way to achieve your risk retention goal, yet allow the industry
to function as efficiently as possible, would be to accept
these certain modifications we are requesting in our comment
letter to you. And one of those was with respect to exempting
single-asset, single-borrower from risk retention for the basic
and simple reason that it is not a conduit security.
Chairman Garrett. The gentleman's time has expired.
Mr. Hill. I yield back.
Chairman Garrett. Mr. Scott? I believe you passed before
you--
Mr. Scott. Yes, thank you.
Chairman Garrett. All set?
Mr. Scott. Yes.
Chairman Garrett. Okay. The gentleman is recognized for 5
minutes.
Mr. Scott. Thank you.
Mr. Renna, let me ask you, because maybe the general
public, those watching on C-SPAN, really need to get a good
understanding of the difference between commercial real estate
and residential real estate. And where is that differential
balance then?
Mr. Renna. Thank you, Congressman. It is very simple. A
residential mortgage loan is underwritten based on the credit
quality of the borrower. They are going to look at how much
money do you make, how much do you have in your savings, and
determine whether they are going to make a loan to you for a
home mortgage.
With respect to commercial financing, they are not looking
at the borrower to underwrite the loan, they are looking at the
asset and the cash flow that comes from the various tenants
that are within that asset, and then also the unique
characteristics of that particular building. How old is it, how
technologically modern is it, other factors that will go into
determining whether it is qualified for a loan, for a mortgage
to be applied to that asset, not to the borrower.
Mr. Scott. I am very concerned that we continue to make
sure that businesses in the commercial market have access to a
variety of financing options.
So let me ask you if you can expand upon, you are familiar
with, I guess it may have been--I'm sorry I didn't get into the
meeting, I had another one--but the CLOs. Right? You are
familiar with the CLOs, is that correct? Are you?
Mr. Renna. I am familiar, but I am not the expert that
people on the panel are with respect to CLOs.
Mr. Scott. Okay. So let me ask you this: How are our
government regulations making it more difficult, in your
opinion, for commercial real estate?
Mr. Renna. Basically, there is kind of a piling-on effect
of a number of regulatory initiatives that are requiring the
holding back, the reserving of capital against commercial
against commercial loans that lenders make.
In addition to that, it is the uncertainty in how it
applies. So it is the amount of capital that the regulations
require lenders to hold with respect to making a loan, and it
is also the uncertainty as to how the rules apply. Risk
retention is an example of that.
The regulators were very broad in discussing how risk
retention is to apply so now the industry has to figure out how
we comply with that. There are many, many open questions to
that.
So what we are asking for from the regulators, and now we
are asking for from Congress, is some specific guidance with
respect to helping us on the most important issues that will
allow the market to operate efficiently.
Mr. Scott. Risk retention, I got it.
Ms. Coffey, I want to talk a little bit about the CLOs. I
am working with my Republican friend, Mr. Barr, on a CLO bill,
House Resolution 4166, the Expanding the Proven Financing of
American Employers Act.
So tell me, why do we need this Act? Why do we need this
bill?
Ms. Coffey. Absolutely. Thank you very much, Congressman.
We need this bill for a couple of reasons. First of all, the
risk retention rule, as it is written, is extremely, very much
over-broad.
What the Dodd-Frank Act said is that the securitizer must
retain 5 percent of the credit risk of the assets being
securitized. The way the final rule is written is that
regardless of what the assets are, the securitizer must retain
5 percent of the full amount of the securitization. That is not
5 percent of the credit risk. Five percent of the credit risk
is a much smaller amount.
If we could move it, the amount that is 5 percent of the
credit risk, which H.R. 4166 does, then smaller managers will
be able to continue to provide financing to U.S. companies.
I will give one quick example. In 2014, 30 managers
accessed the CLO market, and issued CLOs. These managers were
not able to issue CLOs in 2015 all due to risk retention
looming. That is a problem. We can resolve it with H.R. 4166.
Mr. Scott. Both Representative Barr and myself feel the
passage of this bill will help increase jobs. Do you agree with
that?
Ms. Coffey. I absolutely do. It will continue providing
financing for important U.S. companies. Without that financing,
those companies cannot grow and cannot continue to create jobs.
Mr. Scott. Thank you very much.
Thank you, Mr. Chairman.
Chairman Garrett. Mr. Schweikert is recognized for 5
minutes.
Mr. Schweikert. Thank you, Mr. Chairman.
Mr. Johns, first of all, I am going to have all my interns
read your written testimony. It is well written.
In both your verbal testimony and here, you have had a
conversation about, okay, how about the contract obligations?
We are talking about risk retention, I want you to go into that
a little bit more--the opportunity to say, okay, here is what
the review of our trading book says. What can you contractually
also, by hedge, by an additional insurance on that risk?
Mr. Johns. Okay. So the point about contractual obligations
is when you look at a securitization contract, ultimately it
transfers risk to investors. I don't think you can argue that
transfer did occur. If you look at the losses that investors
took during the crisis, it is pretty well-documented that
investors did take losses.
When FASB brought back these transactions on balance sheet,
which I don't think were necessarily objective to disclosure of
the obligations, I think generally is a positive thing; the
issue you get is that you are now disclosing something where
the risk has been transferred. And capital rules do not allow
for recognition of that difference.
So you end up, from an accounting perspective, creating
loss reserves. And you hold capital gains.
Mr. Schweikert. It is important to say that maybe one more
time: Risk isn't transferred, but yet you are still carrying it
under your accounting rules.
Mr. Johns. You have transferred your risk, you have no
contractual obligation to take that risk down, and yet you are
still holding capital gains.
Let me give you some numbers here. If you look at the
crisis, if you are a credit card, losses generally track
unemployment rate up until a point because a credit card only
has a life of about 8 to 12 months. So if you are more than a
year into a crisis, you have already seen tightened
underwriting manifest itself in the performance of credit
cards.
But let us say you are at 10 percent. Say, unemployment in
the last crisis went past 10 percent. Your losses may track up
to that. At the same time, you are being asked to hold 10
percent capital against that risk.
So now, if you look at the combined effect on your capital
position through a write-down on your equity by providing loan
loss reserves and the 10 percent capital you have to hold, now
you have 20-something percent.
If you equate that to what that means for unemployment, you
are really talking about 25-plus percent, which the last time
we saw 25 percent unemployment was in the Great Depression, not
the Great Recession.
Mr. Schweikert. Okay. So the point is pretty simple,
hopefully, for everyone here. Whether it be in automobile,
floor plan, or credit card, you have already transferred the
obligation or the risk portion of the paper, and now under
Dodd-Frank, we are asking you to retain something that you have
already transferred.
Mr. Johns. Exactly. So even if you are a regulator saying,
well, we have to hold capital against the unexpected loss, if
you are an accountant, how can you say the expected loss is
actually assuming that you are going to unilaterally break the
contract that you have with an investor?
That, to me, doesn't make any sense at all. And it is
penalizing the economy in terms of billions of dollars that
could be released back if you release that equity.
Mr. Schweikert. Yes. And it is paper. It is basically a
paper obligation you are carrying on your books that you can no
longer put out on the street.
Mr. Johns. Correct.
Mr. Schweikert. I have always wanted to touch on your
ability for that paper obligation, even though you have
actually already transferred it with those who chose to
purchase the bond, is it hedgable, what is on your book? Could
you buy an insurance product on it? And would that be accepted?
Mr. Johns. Technically, I think yes, it is. I would have to
go back to our members and sort of talk about how you could
hedge that. I don't really want to get into the world of credit
default swaps in front of this audience right now.
Mr. Schweikert. But my understanding is the regulators
would not give you much credit for having lost that.
Mr. Johns. Correct. That is correct.
Mr. Schweikert. So even if you were to add that additional
layer because of your paper obligation, you still don't get
much benefit to it.
Mr. Johns. It wouldn't make a lot of economic sense.
Mr. Schweikert. Also, in your written testimony you
actually do touch on a common securitization platform. In the
last 20 seconds, tell me why it is wonderful.
Mr. Johns. Sorry, say that again?
Mr. Schweikert. Tell me your thoughts on it.
Mr. Johns. I think we are supportive of a common
securitization platform. That is through Freddie and Fannie
effectively combining forces to create one entity.
The benefits of that, of course, are if you combine a
Freddie and a Fannie security, you have now effectively merged
two markets into one. And we all know that the larger the
market is, generally, the more liquid it is, which is a
positive.
Mr. Schweikert. And I know I am over time, Mr. Chairman.
But the benefits of a common securitization platform,
commonality in information disclosure, commonality in products,
so the ability to purchase and actually see visibility.
Mr. Johns. Correct. And by commonality, you create
consistency automatically between the two securities that have
now been merged to one.
Mr. Schweikert. Thank you, Mr. Chairman. I yield back.
Chairman Garrett. Thank you.
Mr. Hultgren is recognized for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you all for being here. I really do appreciate your
work and your input on these important issues.
I am going to address my first question to Mr. Renna. I
have a couple of questions for you, so I will kind of package
them together and see if you can respond to this.
I wonder, did the regulators, as they were preparing the
rules to implement Section 941, the risk retention requirements
under the Dodd-Frank Act, have an opportunity to provide
flexibility to the commercial real estate market, to wonder
what will the effects of this rule be on single-asset loans?
If it would not undermine investor protection or civility
of the market, why wouldn't they use this flexibility?
And then, if you could talk briefly about Mr. Hill's draft
legislation, would that help with this?
Mr. Renna. To your second question, yes, it absolutely
would help with it.
The issue with single-asset, single-borrower, again, goes
to my point that regulators did not want to get into a level of
discernment in drafting the regulations to specific asset
types. That was necessary in order to achieve the goal of risk
retention, yet also allow the sector to be able to function
efficiently.
Single-asset, single-borrower loans weren't in any realm
within the problem of what happened in the downturn of
packaging of bad loans that investors had no idea what was in
them.
They are a single asset that has a single mortgage on it.
Investors can very clearly see how to underwrite that asset.
They want to be able to invest in the bonds that are produced
by that.
We provided data to the regulators explaining the
historical performance of this asset class and making these
other arguments that the rule should not apply to it. They just
did not want to get to that level of discernment.
As a result, you are now applying a cost on single-asset,
single-borrower securitization that has no prudential benefit
to it whatsoever. That is going to result in a tax. And you are
taxing single-asset, single-borrower and you are going to
reduce the capacity of it.
Mr. Hultgren. Thank you.
Switching over to address a couple of questions to Mr.
Plunkett, if I may, Mr. Plunkett, about H.R. 4096, the bill put
forward by Mr. Capuano and Mr. Stivers, I wonder if you could
explain what customer confusion might be caused by the name-
sharing prohibition of the Volcker Rule and what impact this
would have on the funds in your network?
And if you could just explain briefly why you think H.R.
4096 might be helpful in this?
Mr. Plunkett. Thanks very much. It is noteworthy that in
certain foreign jurisdictions, the regulators actually require
that the name of the manager be part of the fund because they
want to make sure that investors know exactly who is managing
the fund.
H.R. 4096 is simply a hyper-technical amendment to make it
easier to permit greater transparency by having the name of the
manager in the fund if the manager thinks that is beneficial.
Mr. Hultgren. Okay, thank you.
I am going to switch back for my last couple of minutes
here.
Actually, Mr. Carfang, if I can address some questions to
you, I think, if I understand it correctly, you are visiting us
from Chicago today, so I'm glad you are here and I'm glad you
didn't get hit by the weather going through Chicago. Hopefully,
we will be able to make it back later this week.
I know you mentioned earlier today that the municipal
securities market has seen some liquidity challenges recently.
What do you see as the major causes?
Mr. Carfang. I think the money market fund regulations
which are being phased in now through October are causing
investors to withdraw assets.
In the tax-exempt market, for example, money market funds
have to move to a fluctuating asset value and are subject to
fees and gates and are limited to what the SEC defines as non-
natural persons.
Most banks have to stand on their heads to figure out what
a non-natural person is and reclassify accounts. They are
simply not doing that and withdrawing the funds. Forty-five
funds have already closed.
Mr. Hultgren. Mr. Carfang, could you explain how the
Volcker Rule impacted the cost of hedging risk and what
consequences this would have for businesses and other customers
of banks?
Mr. Carfang. Okay. Well, the Volcker Rule and the
prohibition for proprietary trading reduces volumes and reduces
the size of dealer inventories, which increases the spreads.
Those wider spreads, when a farmer is trying to hedge a
product, they are paying a higher cost.
And what will happen is at the margin, some will make
decisions, actually go naked and not hedge, but take the risk
themselves.
When the risks are centralized through clearinghouses or
within banks, they are very visible. They can be quantified,
they can be managed.
When the risks are dispersed through hundreds of farms or
co-ops or thousands or whatever, the risks fall in the hands of
those least able to understand and to have the market access to
manage them.
Mr. Hultgren. I see my time has expired. Thank you all for
being here.
Mr. Chairman, thank you for the time. I yield back.
Chairman Garrett. Mr. Stivers is recognized for 5 minutes.
Mr. Stivers. Thank you very much, Mr. Chairman. Thanks for
holding this hearing on a lot of important proposals that are
coming before this committee.
And I appreciate all of you for being here and spending
some time with us.
Mr. Plunkett, I want to follow up on a question that the
gentleman from Illinois just asked you about H.R. 4096, which
Mr. Capuano and I are sponsoring.
Do you think this legislation is any kind of meaningful
alteration of the intent of the Volcker Rule?
Mr. Plunkett. No, Congressman. It preserves the basic
intent of the Volcker Rule provision which is really intended
to keep the name of the bank itself off the name of the hedge
fund.
Mr. Stivers. And so, this proposal actually will help give
investors more information, but not confusing information. Is
that correct?
Mr. Plunkett. It will give them the name of the manager,
which, in the case that the bill addresses, is totally
different from the bank already.
Mr. Stivers. Exactly. Thank you so much for that.
And Mr. Carfang, I have a question on the Volcker Rule. Do
you believe the Volcker Rule is driving part of our liquidity
problems that people are talking about a lot in the
marketplace?
Mr. Carfang. Absolutely. It is causing dealers to not be as
active in the marketplace. Many dealers are actually now
focusing on fewer markets, so you have market makers that used
to be very broad, and make markets in a lot of debt securities
and fixed income products, but are now specializing in just a
few, which then makes all the participants beholden to just a
few market makers in every security. That is risky.
Mr. Stivers. And what does that mean for investors and
anybody who has to access the market by buying and selling
securities, bonds or anything that--
Mr. Carfang. It generally means either higher costs or lack
of supply, lack of access to the market completely.
Mr. Stivers. And candidly, it basically means both or some
combination of the two.
Mr. Carfang. Generally, it is a combination of the two.
Mr. Stivers. There was a PWC study that talked about the
regulatory impacts that were helping create this liquidity
problem. Have you seen any other studies with similar
conclusions?
Mr. Carfang. The U.S. Treasury itself through its TBAC
report actually talks about collateral scarcity and the fact
that when you add up the collateral requirements in terms of
HQLA, liquidity buffers in money market funds, capital buffers
in banks, across-the-board, the sum of the requirements for
high-quality liquid assets basically consumes all high-quality
liquid assets in the marketplace. So you have really put a
binding constraint on economic activity.
Mr. Stivers. If you were advising the FSOC or the Office of
Financial Research, do you think this is a subject they should
look into?
Mr. Carfang. Absolutely. This is one of the most important
things.
Mr. Johns. I would just, maybe if I could add something?
Mr. Stivers. Yes, please.
Mr. Johns. I don't think it is just FSOC who should be
looking into this. I would encourage the regulators to do their
own review. I would advise more hearings of this nature. We
totally endorse that.
Mr. Stivers. What about the OFR, which is responsible,
under Dodd-Frank, the bill that you supported, to do research
on systemic problems? Shouldn't they research this? It is their
job to research.
Mr. Johns. Sure. Frankly, from the perspective of SFIG, we
would encourage as many studies across-the-board as we can
possibly get on this--we haven't even seen Dodd-Frank finish
its implementation. We are not going to see that for another 2
or 3 years. So the most liquid market in the world right now is
suffering, while in Europe, which has never been as liquid as
the United States, we are seeing actions already being taken to
try to make sure that they don't over-regulate.
Mr. Stivers. Yes. And I think that this coming crisis has
lots of causes, but one of them is directly at regulators and
especially the Volcker Rule. So we need to make sure that we
can understand the causes and the impacts on consumers,
investors, and the marketplace, and what it means for volume
and how some of it will move overseas.
And we also need to make sure that we address it as quickly
as we can in a meaningful way and mitigate the problems created
by it.
Mr. Johns. I completely agree.
Mr. Stivers. Yes, thank you.
I yield back the balance of my time, Mr. Chairman.
Chairman Garrett. Thank you.
The gentleman from California, Mr. Royce, is recognized for
5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Renna, when you suggest that $200 billion of commercial
mortgage-backed securities in the marketplace will require
refinancing, you say over the next 2 years, what would happen
to borrowers if CMBS lending is insufficient to cover that need
or that sum?
Mr. Renna. Thank you, Mr. Royce. Basically, the borrowers
become more in distress because they have to go to a different
type of lender. The CMBS lender is a very efficient lender. It
gives them best price and proceeds. It also provides them with
a 10-year fixed loan that is non-recourse in nature.
If they have to go to a different lender to refinance their
asset when their loan comes due, they are probably going to go
to a lender that can only provide them shorter-term, perhaps a
floating-rate loan, and would require recourse.
All those things mean, to cut through the technicalities,
that borrowers are not going to be able to borrow as much for
their asset and they are going to have to put up more equity.
And if they can't do that, then they are going to be in
default.
Mr. Royce. So what would the economic impact be, let us say
for pension funds, or life insurance? When you look at
constituents out there, how would that affect them?
Mr. Renna. Sure. The performance of the bonds is what the
pension funds and life insurance companies are interested in.
If the underlying mortgages are not performing because when
they come up to refinance they have difficult refinancing, then
their investment is going to suffer as a result of that.
And going forward, when they want to go and then reinvest
in those types of CMBS bonds that provide them the risk-
adjusted return they are looking for, there is not going to be
as much of that in the marketplace for insurance companies and
pension funds to invest in to provide them with the cash flow
they need to match up with their needs with respect to
beneficiaries.
Mr. Royce. As you know, European regulators are considering
a high-quality securitization framework that could differ from
U.S. rules. It appears that in Europe, they recognize that the
current rules under consideration in their argument may be too
onerous to support a liquid ABS market.
If we don't have global convergence on these rules, what
would that impact be on the United States?
I will ask Mr. Johns that question.
Mr. Johns. If you don't have global convergence, you have
two issues. Number one, if Europe just goes its own way, then
you will see European collateral gets the capital relief, and
European investors get to take that capital relief. So
consequently, they are incentivized to just invest in Europe
while the U.S. investor base will remain permanently based in
U.S. assets.
That creates, maybe not a bifurcation, but it certainly
fragments a global market. And we all know markets are global.
If you see Basel/IOSCO take root, then all investors across
the world, except for the United States right now, potentially
could get this capital relief, meaning that they now can get a
higher rate of return on capital by investing in the same
product relative to what a U.S. investor might be.
That means you are going to see more non-U.S. investors
investing in the U.S. economy. I don't think that is a good
thing. If you expand to what happens if we see another crisis
and another bailout mechanism, what we saw last time is when
local governments came in and gave money to their local banks,
there was a stipulation attached to a lot of that, that they
could only then re-lend it within that jurisdiction.
Mr. Royce. The European Commission created a Better
Regulations Task Force. And that includes a public call for
evidence to review financial regulations and to consider ways
to recalibrate rules to support market liquidity, lending,
economic expansion.
Does it make sense then that we do the same?
Mr. Johns. It makes absolute sense. We have a lot more to
lose, considering how liquid our markets are to begin with.
Mr. Royce. I will go back and let Mr. Renna answer that,
and expound on that other question I had asked as well about
the consequences.
Mr. Renna. Yes, there definitely needs to be an alignment
between the United States and Europe and how they are applying
these types of standards.
And again, I think it goes to, Congressman, just the idea
of uncertainty in the marketplace with respect to how
regulators generally are treating the capital markets.
The capital markets are global. They are not just European
or U.S., they are global, and there needs to be harmonization
between the two.
Mr. Royce. Thank you very much, Mr. Chairman. I appreciate
the time.
Chairman Garrett. The gentleman yields back.
And I see we have been joined by a couple of other Members.
Mr. Ellison is recognized for 5 minutes.
Mr. Ellison. Let me thank the chairman and the ranking
member and all the members of the panel.
Just a few questions. Section 941 of Dodd-Frank requires
that securitizers or originators retain up to 5 percent of the
credit risk of asset-backed securities.
Directing my question to Mr. Stanley, could you please
describe why Congress and the public determined that it was
necessary to retain such risk? And what problem was Congress
wanting to address by requiring skin in the game?
Mr. Stanley. Fundamentally, what we learned during the
financial crisis was that there are grave dangers in the
originate-to-distribute model because the people who are
structuring very complex, very opaque securities are selling
them to other people who will take the losses if those
securitizations fail to perform.
And we saw investors being misled about the quality of the
underlying loans in the securitizations--police this market.
And I think reforming the credit rating agencies is another
thing we need.
But risk retention is designed to align those incentives
properly between the sponsor and the investor.
Mr. Ellison. So, there is a pending piece of legislation,
H.R. 4166. It would allow a CLO manager to only retain about
.004 percent or 40 basis points of the credit risk of a
qualifying CLO if the CLO meets certain requirements. Is
retaining only 40 basis points significant enough to ensure
that the CLO manager has an economic interest in the long-term
performance of a security?
Mr. Stanley. I don't believe it is. That is $400,000 in
economic risk on a $100 million deal. I don't believe that is
adequate.
And we also saw that in order to qualify for that level of
risk retention, there were no restrictions or rules put on the
quality of the underlying loans there. You could lend to a
very, very heavily leveraged company to the equivalent of
subprime business lending and get that exemption.
Mr. Ellison. So how does retaining 40 basis points, or .004
percent, slice of the credit risk compare to a CLO manager's
other income?
Mr. Stanley. Excuse me, I am not sure--
Mr. Ellison. I guess the question is, how meaningful is it?
Is it a loss that they can bear? So my question is, how does
retaining a 40 basis point slice of the credit risk compare to
a CLO manager's other income?
Mr. Stanley. I think that absolutely would be a loss that
they could bear. And potentially, the danger that you see is
that you could profit more on misleading investors as to the
quality of a hundred million dollar deal in terms of the price
you would get for that than you stood to lose in terms of the
risk that you had retained.
Mr. Ellison. Thank you.
Ms. Coffey. Congressman Ellison, may I put some math around
the numbers?
Mr. Ellison. Feel free, yes.
Ms. Coffey. Certainly. One of the things that the Dodd-
Frank Act said is credit risk retention needs to be 5 percent
of the credit risk of the assets. It does not need to be 5
percent of the notional amount of the securitization; it has to
be 5 percent of the credit risk.
So one of the things that has been proposed in the
qualified CLO is that the CLO manager must retain 5 percent of
the equity. Almost all the credit risk resides in the equity;
so therefore, by holding 5 percent of the equity, the manager
is holding 5 percent of the credit risk.
When you add the subordinated fees on top of that, which
also invites credit risk, they hold more than 5 percent of the
credit risk. That actually conforms with the Dodd-Frank Act.
Mr. Ellison. Do you buy that, Dr. Stanley?
Mr. Stanley. Yes. I just don't see how we can argue after
the experience of the financial crisis that the only credit
risk in a securitization is just in that equity slice.
When you look at this bill, the CLO is actually allowed to
hold 10 percent of its assets in high-risk loans. They only
have to hold--the requirement is that they hold 90 percent of
their assets in senior debt. So, that could be 10 percent of
their assets in high-risk business loans.
And that 10 percent itself exceeds the 8 percent equity
tranche. So, I just don't really buy the argument.
Mr. Ellison. Mr. Green, do you have any thoughts on this?
Mr. Green. Yes. And I would add that the performance of the
higher tranches was a problem as a mark-to-market basis during
the crisis. And quite frankly, you saw, which is what motivated
the conflicts of interest rule by Carl Levin, and the
Technology Permanent Subcommittee on Investigations highlighted
very clearly, and which is somewhat presented in the movie,
``The Big Short,'' that has not been done and completed by the
Securities and Exchange Commission to date.
So there are a lot of things that need to be done,
including the final implementation of risk retention, the
implementation of the ban of conflicts of interest and other
things.
Mr. Ellison. I am out of time. Let me thank the panel.
Chairman Garrett. The gentleman's time has expired.
Mr. Messer is recognized for 5 minutes.
Mr. Messer. Thank you, Mr. Chairman.
I want to thank all of the members of the panel.
As a Member who represents 19 rural counties in
southeastern and central Indiana, I frequently hear from
constituents who are struggling to gain access to capital,
loans, and financial products that fit their unique needs.
Many of the lenders in my district, and financial services
providers, have expressed concerns to me about the overly
burdensome regulations and increased compliance costs and that
they are a major hindrance to their ability to serve customers
in my area of the country.
And while most everyone agreed that in the wake of the 2008
financial crisis, reform in the financial service sector was
necessary, this Administration's response with a cocktail of
laws and regulations has, in effect, prevented healthy market
competition and caused severe liquidity shortages, as we have
discussed today.
I want to thank the chairman for calling this hearing to
discuss the difficulties these laws and regulations have caused
for commercial mortgage-backed securities and collateralized
loan obligation providers.
These providers fill important market demand, especially in
my district in Indiana, and all across the country.
I believe the proper role of the Federal Government should
be to promote consumer choice and encourage competitive markets
and provide smart regulation to protect consumers. Of course,
that doesn't mean that government should try to regulate all
risk out of the market.
And so, my first question is to Mr. Renna. You mentioned
today in your testimony that as a result of these risk
reduction policies, we should see a reduction in overall
commercial lending. What effect do you think that will have in
tertiary markets or, in English, smaller markets like in my
district in rural Indiana? Do you think we will start to see
those effects even before regulations kick in at the end of the
year?
Mr. Renna. Yes, thank you, Congressman. Those are the
markets that are going to suffer first, because what CMBS
achieves and the role that it fulfills in commercial real
estate lending is to mostly be able to provide financing to
secondary and tertiary markets, not major markets themselves.
It does this because by accessing the public capital
markets, you get an efficiency of borrowing, and that passes
through to borrowers who maybe don't have the most pristine
credit or their assets have some issues with them.
CMBS is intended to apply to those types of properties. And
if there is too much restriction on it or unnecessary
restriction--we accept risk retention. It is the law until
Congress changes it. We are simply trying to get the regulators
to acknowledge the uniqueness of our asset class within the
regulatory rules.
Mr. Messer. And take their business elsewhere after these
regulations kick in, away from commercial mortgage-backed
securities.
Mr. Renna. Everything is risk-adjusted return. It is really
going to depend on the ability of the lending market to be able
to put the product out there for investors. I think the
investors will find that it is a solid product, but it is going
to be--I think the calculus more is, what is the entire amount
of financing that the lenders will be able to provide?
Mr. Messer. Yes, okay.
Next question to Ms. Coffey. And again, I appreciate your
testimony as well. You note in your testimony that more than
1,000 companies employing more than 6 million people receive
financing from CLOs, securitized corporate debt, many of which,
of course, do business in Indiana and in my district, and I am
sure in almost every other district in the country.
Would you elaborate on the effects that rules like the
Volcker Rule and others could have on U.S. businesses that rely
on asset-backed security markets?
Ms. Coffey. Sure. What I would like to do is focus on risk
retention because that is very much the challenge today.
What the risk retention rule will do is it will
dramatically reduce the formation of CLOs going forward. We
have already seen that. Starting in the second half of 2015,
investors required risk retention on CLOs or the ability to
comply and issuance dropped off very dramatically.
What does this mean to companies like those in your
district? This means that the $420 billion of financing that
CLOs provide to companies, like those in your district, will no
longer be available. What will those companies do?
They have two choices. They can find more expensive sources
of financing, like hedge funds, not ideal, or they might not
get the financing at all, which would impact jobs, could create
downsizing, or, worst-case scenario, even bankruptcies.
Mr. Messer. So you have sort of answered this question, but
let me ask you more directly. Will these policies hurt the very
people that they are designed to protect?
Ms. Coffey. Absolutely.
Mr. Messer. Thank you.
I have no further questions, Mr. Chairman. I yield back the
balance of my time.
Chairman Garrett. The gentleman yields back his time.
The gentleman from Massachusetts, Mr. Capuano, is
recognized for perhaps the final word.
Mr. Capuano. That is good; I like that.
Chairman Garrett. I know; that is a little scary.
[laughter]
Mr. Capuano. I know, it is unusual. I will make it nice.
Mr. Chairman, I just came by briefly. First of all, thank
you for your indulgence. I am not on this subcommittee. And
thank you for the opportunity to participate for a minute.
I really just came by to say thank you to the chairman and
the ranking member for putting forward what is hopefully a
relatively noncontroversial bill.
I consider myself a great defender and a great supporter of
Dodd-Frank and all these items that we have discussed today. I
think most of my position is pretty clear.
However, I never thought that any law was 100 percent. And
I think part of our responsibility is when we do something, if
we find a problem with it later on, we should fix it.
I actually think H.R. 4096 is a relatively simple fix to a
relatively simple problem that I don't believe at all will
jeopardize anybody. And for those of you who think that it
might, I would love to have a discussion with you to see. This
is not the place. I actually don't like these hearings because
you can't have a discussion. I would like to hear from you
because that is not my intent.
My intent is simply to allow business to do something that
I don't think we intended to do in the first place.
And I want to say, Mr. Chairman, that I think it is--I am
not so sure how I fit into this bipartisanship. It is not
comfortable for my role. I am not used to it.
But I am getting used to it. Last year, you and I
cosponsored a bill, and I really expected the earth to split in
half when you and I cosponsored a bill. And it didn't happen. I
was a little disappointed.
Chairman Garrett. It held together, yes.
Mr. Capuano. We can hope.
Chairman Garrett. We can do it again.
Mr. Capuano. I hope so. And this year, again, these are
small bullet shots right directly to a problem. And I wanted
to, again, thank you for the opportunity to do this.
I know it is unusual, not just for me, it is also a little
unusual for you. And I wanted to thank you for doing it and I
look forward to working with you on this and many, many
important items in the future.
Chairman Garrett. For years to come.
And I thought you were going to be the last word on this.
Mr. Capuano. Barr came back, huh?
[laughter]
Chairman Garrett. Mr. Barr has returned.
Does the gentleman yield back the remainder of his time?
Thank you.
Mr. Barr is recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
To the witnesses, thanks for your patience. I think I am at
the end of the line here.
I want to focus on how the regulators' overly broad
application of risk retention requirements will actually
destabilize the financial system, and how my legislation, H.R.
4166, the Barr-Scott legislation, would actually enhance
financial stability.
First, I would reference a letter that I wrote to the Chair
of the Federal Reserve, Janet Yellen, last fall, in which I
asked whether or not she would support the concept of a
qualified CLO as included in our legislation.
And in part, this is what she wrote back, ``The Board
recognizes certain structural features of qualified CLOs may
contribute to aligning the interests of CLO managers with
investors with respect to quality of securitized loans in this
regard. An increase in the availability of CLOs that reflect
strengthened underwriting and compensation standards, among
other features, could be considered a positive development in
the market.''
I request unanimous consent to insert this letter into the
record.
Chairman Garrett. Without objection, it is so ordered.
Mr. Barr. Thank you.
And now, I would like to turn to Ms. Coffey and examine Dr.
Stanley's contention that bond issuance assured Mr. Green's
arguments that this is a make-believe liquidity crisis.
This contradicts your testimony regarding the 2015
precipitous drop in CLO issuance. And I would like to give you
the chance to respond to that.
Ms. Coffey. Thank you very much, Congressman Barr.
As we saw in 2015, the beginning of the year actually went
fairly well for CLO formation and, hence, financing to U.S.
companies.
By the time we hit the middle of the year, most investors
were saying CLO managers needed to be able to show the ability
to comply with risk retention. And we saw CLO formation drop 40
percent in the first half of the year. We saw 39 issuers that
issued CLOs in 2014 being unable to issue them in 2015.
Mr. Barr. Yes, and considering the fact that mortgages were
at the epicenter of the crisis, and yet enjoy a qualified
mortgage safe harbor, it seems to make sense that we should
provide an analogous safe harbor of a qualified CLO to an asset
class that, as you have testified to, performed much better
during the financial crisis in over a 20-year period.
Obviously, it performed well with a negligible default rate.
Let me ask you also, Ms. Coffey, to respond to, I think Dr.
Stanley's concern, about covenant light loans. And what does
our bill do about covenant light loans and asset quality?
Ms. Coffey. Certainly. So first of all, one of the things I
would like to say about covenant light loans is our proposal
actually has a constraint on covenant light loans, limiting
them to a lower amount than what we see in the market today.
Mr. Barr. So asset quality would actually be enhanced
through this legislation?
Ms. Coffey. Correct.
Mr. Barr. Now, let us turn to my colleague, Mr. Lynch's,
concern, and Dr. Stanley's concern, that our bill would risk
repeating the originate-to-distribute model that led to the
financial crisis.
Can you respond to this particular criticism, especially
with reference to the fact that CLOs are long only, match
funded, meaning that they issue long-term bonds, not mark-to-
market and, therefore, actually act to stabilize the market?
Ms. Coffey. Absolutely. Two points. One, CLOs are not
originate-to-distribute securitizations. Two, CLOs are
completely match funded. They are buyers when other people are
sellers; and thus, they act to stabilize the market. That is a
very important benefit for U.S. companies.
Mr. Barr. And finally, let us talk about 2018, 2019, and
2020 and the maturity wall with CLOs. And if we don't fix this
problem, what will happen to the financial stability of the
corporate credit market out there, particularly when you have,
as Moody's says, CLO formation shrinking and corporate
refunding requirements expanding, especially through 2020 and
the impact that a failure to fix this problem will have on
access to credit and the cost of financing for job-producing
American companies?
Ms. Coffey. Absolutely. In 2019, 2020, there is expected to
be $700 billion of refinancing needs. CLOs, as they are
currently constituated, have about a hundred billion dollars in
2019, and about $20 billion of capacity in 2020. If they go
away, if there is no more CLO formation, that gap is going to
have to either be financed elsewhere expensively through
entities like hedge funds, or companies will not get the
financing they need.
Mr. Barr. And in the remaining time that we have, about 30
seconds, could you talk about the impact that diminution of the
CLO market will have on job creation, and then also why a
qualified CLO concept enhances the distinction between the
residential mortgage-backed securities that were the cause of
the financial crisis and what we are describing here in this
legislation?
Ms. Coffey. Absolutely. The qualified CLO puts six
constraints on CLOs that will enhance their quality: asset
quality; portfolio diversification; capital structure;
alignment of interest; regulation and transparency; and
disclosure. By putting that in and requiring the manager to
retain 5 percent of the equity, we meet the Dodd-Frank rules
and we will have a continuation of CLOs that will provide
financing to U.S. companies.
Mr. Barr. Thank you for testifying.
Mr. Johns. And I would just add one thing, from an SFIG
perspective. We have investors and issuers in our membership;
about 20 percent of our 350 members are investors. This has
support across-the-board here, so the balance of making sure
investor and issuer interests is pretty well-established.
Mr. Green. And if I could add one thing, it is important to
distinguish between liquidity and credit. Absolutely, we should
make sure that companies have access to credit. But the most
important thing to do is they have to assure that credit
quality is good, that means the macro economy continues to need
to grow.
Mr. Barr. I think it is an indication that we need to be
focusing on what the views are of market participants, not just
what the New York Fed is saying.
Thank you, I yield back.
Chairman Garrett. And with that note that we are not going
to be paying so much attention to the New York Fed going
forward--
[laughter]
Let me begin by saying thank you again to the entire panel.
This was a great panel from both sides of the argument here,
but very in-depth, and I very much appreciate getting into the
weeds with this complicated issue.
And I very much appreciate having people like Mr. Barr and
Mr. Hill here who were able to dive down into it, certainly
with Mr. Hill's background in this area as well.
So thank you, Mr. Hill, for your knowledge on this topic
and for digging it out as well.
I think one of the takeaways today is that this was the
highly rated asset-backed securities. I think it was
uncontroverted, was not, vis-a-vis the other asset classes, a
cause of the root problem. I think we have heard that from the
very beginning to the very end.
And I think we also heard, not unanimously of course, but
strongly, from the actual market participants that we are
concerned about, that we should be concerned about the impact
of Dodd-Frank in this area.
So with that being said, I would like to thank all the
witnesses again.
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, this hearing is hereby adjourned.
Thank you.
[Whereupon, at 12:32 p.m., the hearing was adjourned.]
A P P E N D I X
February 24, 2016
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