[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





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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

                              ----------                              
                                                                   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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