Posts Tagged ‘Asset-backed securities’

Statement on Asset-Backed Securities and Credit Rating Agencies

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday August 29, 2014 at 9:00 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here and here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Commission will today [August 27, 2014] consider recommendations of the staff for adopting two very important final rules in different, but closely related, areas—asset-backed securities and credit rating agencies.

The reforms before us today will add critical protections for investors and strengthen our securities markets by targeting products, activities and practices that were at the center of the financial crisis. With these measures, investors will have powerful new tools for independently evaluating the quality of asset-backed securities and credit ratings. And ABS issuers and rating agencies will be held accountable under significant new rules governing their activities. These reforms will make a real difference to investors and to our financial markets.

We will first consider the recommendation related to asset-backed securities, and then we will consider the rules relating to credit rating agencies.

…continue reading: Statement on Asset-Backed Securities and Credit Rating Agencies

Do Banks Always Protect Their Reputation?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from John Griffin and Richard Lowery, both of the Department of Finance at the University of Texas at Austin, and Alessio Saretto of the Finance Area at the University of Texas at Dallas.

A firm’s reputation is a valuable asset. Arguably, conventional wisdom suggests that a reputable firm will always act in the best interest of their clients to preserve the firm’s reputation. For example, in his testimony/defense of Goldman Sachs before Congress, the Chairman and CEO Lloyd Blankfein states, “We have been a client-centered firm for 140 years and if our clients believe that we don’t deserve their trust, we cannot survive.” In our forthcoming Review of Financial Studies article entitled Complex Securities and Underwriter Reputation: Do Reputable Underwriters Produce Better Securities?, we examine the extent to which this conventional wisdom holds with complex securities.

…continue reading: Do Banks Always Protect Their Reputation?

Statement on the SEC’s Issuance of Certain Exemptive Orders Related to Rule 17g-5(c)(1)

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Tuesday January 14, 2014 at 9:25 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a public statement by Commissioner Aguilar regarding the SEC’s recent issuance of exemptive orders of NRSROs to conflict of interest prohibitions under Rule 17g-5(c)(1) of the Exchange Act; the full text is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Rule 17g-5(c)(1) (the “Rule”) of the Securities Exchange Act of 1934 addresses nationally recognized statistical rating organization (“NRSRO”) conflict of interest concerns by prohibiting an NRSRO from issuing a credit rating where the person soliciting the rating was the source of 10% or more of the total net revenue of the NRSRO during the most recently ended fiscal year. [1] As noted by the Commission, this prohibition is necessary because such a person “will be in a position to exercise substantial influence on the NRSRO” and, as a result, “it will be difficult for the NRSRO to remain impartial, given the impact on the NRSRO’s income if the person withdrew its business.” [2] The Commission also recognized that the intent of the prohibition “is not to prohibit a business practice that is a normal part of an NRSRO’s activities,” and that the Commission may evaluate whether exemptive relief would be appropriate. [3]

…continue reading: Statement on the SEC’s Issuance of Certain Exemptive Orders Related to Rule 17g-5(c)(1)

NY Court: Claims for Breach of RMBS Representation & Warranties Accrue on Issuance

Editor’s Note: Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, George T. Conway III, Elaine P. Golin, Jeffrey D. Hoschander, and Justin V. Rodriguez.

In an important decision last week, a New York appellate court ruled that claims for breach of representations and warranties made in connection with residential mortgage-backed securities (RMBS) accrue when the representations and warranties are made, which typically occurs when the securitization closes. ACE Securities Corp. v. DB Structured Products, Inc., No.650980/12 (N.Y. App. Div. 1st Dep’t Dec. 19, 2013). The court held that the six-year contract statute of limitations begins to run at that time, instead of when a defendant refuses to comply with a plaintiff’s demand for a contractual remedy.

…continue reading: NY Court: Claims for Breach of RMBS Representation & Warranties Accrue on Issuance

Credit Crisis Litigation Update: It is Settlement Time

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday November 30, 2013 at 9:00 am
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Editor’s Note: The following post comes to us from Faten Sabry, Senior Vice President at NERA Economic Consulting, and is based on a NERA publication by Ms. Sabry, Eric Wang, and Joseph Mani; the full document, including footnotes, is available here.

It has been more than six years since the onset of the credit crisis and we have documented for the first time in the past few months a significant increase in the number and size of settlements. Meanwhile, the pace of new filings has slowed as housing markets continue to improve and delinquencies and defaults decline. However, litigation arising from the credit crisis is far from over.

In this post, we discuss the recent trends of settlement activity and review some of the major settlements in credit crisis litigation. We also discuss mortgage settlements that are related to repurchase demands mainly between mortgage sellers and Fannie Mae and Freddie Mac. We then examine the current trends in filings, including the types of claims made, the nature of defendants and plaintiffs in the litigation, and the financial products involved.

Our main findings, which are discussed in greater detail below, include the following:

…continue reading: Credit Crisis Litigation Update: It is Settlement Time

Statement Regarding Joint Rule Reproposal Concerning Credit Risk Retention

Posted by Michael S. Piwowar, Commissioner, U.S. Securities and Exchange Commission, on Friday September 20, 2013 at 8:53 am
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Editor’s Note: Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s statement regarding the SEC’s joint rule reproposal concerning credit risk retention. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Securities and Exchange Commission (“SEC” or “Commission”) today approved a joint rule reproposal to implement Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). [1] I am not able to support the release in the form approved because the reproposal does not contain necessary economic analyses and does not adequately consider alternatives to credit risk retention requirements or the interplay between those requirements and other regulatory reforms.

Before discussing these shortcomings, I want to recognize all the hard work the SEC’s staff in the Division of Corporation Finance and the Division of Economic and Risk Analysis (“DERA”) put into developing the joint rule reproposal. I also want to thank them for briefing me on the rulemaking and answering my questions.

While I am not able to vote in favor of the reproposal, I am encouraged that some improvements were made to the original proposal in response to public comments. For example, the reproposal removes the problematic premium capture cash reserve account approach. And, with respect to some classes of asset-backed securities (“ABS”), the reproposal revises various risk retention obligations and allows alternative incentive alignment practices.

…continue reading: Statement Regarding Joint Rule Reproposal Concerning Credit Risk Retention

Agencies Re-Propose Rule Implementing Risk Retention Requirements of Dodd-Frank Act

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday September 6, 2013 at 8:56 am
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Editor’s Note: The following post comes to us from Eric R. Fischer, partner in the Business Law Department at Goodwin Procter LLP, and is based on a Goodwin Procter Financial Services Alert by William E. Stern, Brandon T. Thompson, and Brian M. Baum.

On August 28, 2013, the FDIC, OCC, FRB, SEC, Federal Housing Finance Agency, and Department of Housing and Urban Development (collectively, the “Agencies”) issued a second Notice of Proposed Rulemaking (the “revised proposal”) that would implement the risk retention requirements of Section 941 of the Dodd-Frank Act, which amended the Securities Exchange Act of 1934 (the “Exchange Act”) by adding a new Section 15G. Section 15G requires the Agencies to issue rules that would generally require that a securitizer of asset-backed securities (“ABS”) retain an economic interest in not less than 5% of the credit risk of the assets collateralizing such ABS. As discussed in the April 19, 2011 Financial Services Alert, the first Notice of Proposed Rulemaking (the “original proposal”) was jointly approved in April 2011 by the Agencies. In response to numerous comments received on the original proposal, the Agencies collectively developed the revised proposal, which includes significant modifications.

…continue reading: Agencies Re-Propose Rule Implementing Risk Retention Requirements of Dodd-Frank Act

The Supply and Demand for Safe Assets

Posted by Gary Gorton, Yale School of Management, on Friday March 22, 2013 at 9:15 am
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Editor’s Note: Gary Gorton is a Professor of Finance at Yale School of Management.

In the recent NBER working paper, my co-author, Guillermo Ordoñez of the University of Pennsylvania, and I develop a model to examine the important role collateral plays in the economy. Where do safe assets come from? Empirical evidence suggests that the private sector creates more near riskless assets when the supply of government debt is low and reduces privately-created near riskless assets when the supply of government debt is high. Krishnamurthy and Vissing-Jorgensen (2012) show that the net supply of government debt is strongly negatively correlated with the net supply of private near-riskless debt.

The substitution between public and private safe debt is also shown by Krishnamurthy and Vissing-Jorgensen (2012) who document that changes in the supply of outstanding U.S. Treasuries have large effects on the yields of privately created assets. Gorton, Lewellen, and Metrick (2010) also find this relationship between government debt and privately produced substitutes. They document that the share of safe assets in the U.S. economy, including both U.S. Treasury debt and privately created near-riskless debt has remained constant as a percentage of all U.S. assets since 1952. Xie (2012) shows that the issuance of asset-backed securities tends to occur when the outstanding government debt is low and Sunderam (2012) documents the same phenomenon with respect to asset-backed commercial paper.

By “safe assets,” we mean government debt and privately created high quality debt, in particular, asset-backed securities. Such safe assets are used to collateralize repo, derivative positions, and are needed as collateral in clearing and settlement. See IMF (2012). Further, because they are ”information-insensitive” (in the nomenclature of Dang, Gorton, and Holmstrom (2012)), they are highly liquid and hence can store value without fear of capital losses in times of stress, a form of private money.

…continue reading: The Supply and Demand for Safe Assets

Corporate Finance Perspective on Large-Scale Asset Purchases

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday December 28, 2012 at 8:06 am
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Editor’s Note: This post is based on the recent remarks of Jeremy C. Stein, a member of the Board of Governors of the Federal Reserve System, at the Third Boston University/Boston Fed Conference on Macro-Finance Linkages, which are available here.

Given that the conference theme is macro-finance linkages, I thought I would try to lay out a corporate finance perspective on large-scale asset purchases (LSAPs). I have found this perspective helpful in thinking both about the general efficacy of LSAPs going forward, and about the differential effects of buying Treasury securities as opposed to mortgage-backed securities (MBS). But before I get started, please note the usual disclaimer: The thoughts that follow are my own and do not necessarily reflect the views of other members of the Federal Open Market Committee (FOMC). I should also mention that these comments echo some that I made in a speech at Brookings last month. [1] As I noted in that speech, I support the Committee’s decision to purchase mortgage-backed securities (MBS) at a rate of $40 billion per month, in tandem with the ongoing maturity extension program in Treasury securities, and its plan to continue with asset purchases if the Committee does not observe a substantial improvement in the outlook for the labor market.

…continue reading: Corporate Finance Perspective on Large-Scale Asset Purchases

Evaluating Large-Scale Asset Purchases

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday October 29, 2012 at 9:12 am
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Editor’s Note: This post is based on the recent remarks of Jeremy C. Stein, a member of the Board of Governors of the Federal Reserve System, at the Brookings Institution; the full speech, including footnotes, is available here.

I’d like to describe the framework I have been using to think about monetary policy in the current environment, focusing primarily on the role of large-scale asset purchases (LSAPs).

There is a considerable diversity of views within the FOMC, and among economists more generally, about the use of LSAPs and other nonconventional policy tools. This diversity is both inevitable and healthy given the unprecedented circumstances in which we find ourselves. To be clear on where I stand, I support the Committee’s decision of last month—namely, to initiate purchases of mortgage-backed securities (MBS) at a rate of $40 billion per month, in tandem with the ongoing maturity extension program (MEP) in Treasury securities, and to plan to continue with asset purchases if the Committee does not observe a substantial improvement in the outlook for the labor market. Given where we are, and what we know, I firmly believe that this decision was the right one.

In my comments, I will only briefly review the case for taking action, as that ground has been well covered in a number of other places, most notably in Chairman Bernanke’s recent Jackson Hole speech. Instead, I will explore in more detail the factors that make decisions about LSAPs so challenging. The Chairman discussed these challenges in his recent speech, saying: “Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies.”

…continue reading: Evaluating Large-Scale Asset Purchases

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