(Updated on 1/29/14 to revise and correct quotes.)
Regulation and reform are overarching themes at ABS Vegas, and Thursday morning Chris Cox, former chairman of the U.S. Securities and Exchange Commission and partner with Bingham McCutchen and president of Bingham Consulting, took the subject on.
He began with a quiz (See below)
“The world of securitization will most definitely be a more heavily regulated one,” Cox said. "The Volcker Rule, I predict, will soon take its place alongside the Internal Revenue Code in the pantheon of impenetrable legalese."
Cox said it is highly likely the Volcker Rule as it is written will determine enforcement of behavior on the street – that is, potentially inflexible enforcement of Volcker will be what determines the impact of Volcker on the market, which makes it sound like there is a lot of danger in how strictly it could be enforced.
"Structured finance can reduce the cost of credit throughout the capital markets. Properly managed, with appropriate safeguards, it can be a boon to any American with a home, a car, or a child in college. Homes, cars, and college tuition, like so many other things we need, are more often than not financed with loans," he said. "The fact is that transforming pools of illiquid assets into tradable securities undeniably stimulates the flow of credit."
The post crisis world is here, regardless, and every actor needs to understand that the world of securitization will be a more highly regulated world.
"It is now necessary to embrace the new requirements being placed on the industry," Cox said, even if those burdens are heavy. "At Bingham we calculated that Dodd-Frank will require 243 new rule makings – 20,000 pages of new regulations."
Cox said that there will be no reform this year on the legislative side, and that any near-term hope for PATH or Corker-Warner is misplaced.
"Congress is going to do almost nothing of consequence for the foreseeable future," he said. "Not only is there hopeless gridlock as between the House, Senate, and White House, but this is an election year, when campaigning trumps legislating."
Cox said that the impact that former congressman Mel Watt will have on GSE reform may be significant.
"Now, however, it's expected that Congressman Watt will be pushing FHFA in a different direction," Cox said. "When one thinks of major legislation of this type that has been enacted in the past, such as FIRREA during the Savings and Loan crisis or TARP during the most recent financial crisis, the pattern has been that Congress looks to the Administration to submit a legislative package. This is the model of 'the president proposes, and the Congress disposes.' But on GSE reform, we haven’t seen that at all. Over the last five years, the Administration has never submitted a bill."
A quick survey showed attendants were equally cynical – 50% said they don’t expect reform before the next presidential election, and the second closest choice was “Never” coming in at 28%.
A big problem is that a lot of the pressure and proposals for GSE and regulatory reform comes from those not well versed in the securitization industry.
"The proven model of subject-matter regulators is under threat," Cox said. "The FSOC is a Treasury-centric group, and it includes a number of very disparate agencies that often know little about the substantive details of the others’ work. The idea behind the Council was to bring together diverse viewpoints, on the theory that this would result in more carefully vetted decisions. But this model has the potential to do just the opposite. It gives political appointees without subject matter expertise the power to override the carefully considered decisions of independent regulators."
He cited a recent U.S. Department of the Treasury’s Office of Financial Research report that wanted to subject non-bank asset management companies by the same regulatory standards of banks.
"Were everyone in this industry to be treated like a bank and subjected to bank regulation, it would be investors who would bear the extra costs -- and it would be investors who would suffer the potentially diminished returns from these restrictions on asset managers’ activities." ... "To its credit, the SEC did not embrace the report," he said.
He said the Department of the Treasury’s Financial Stability Oversight Council continues pushing this approach multiple and conflicting regulatory requirements – something that will saddle investors and taxpayers with the bill.
"But one can’t achieve an intelligent dialogue with an entity that has no way to engage in one. Subject matter regulators have developed elaborate processes to listen to the regulated community and to learn from the give and take. The FSOC’s process, in contrast, is entirely opaque," Cox said.
"On issue after issue -- most recently on the credit retention proposal -- the securitization industry has been fully engaged, and the subject matter regulators have been willing to listen. The process so far has been very productive."
The complex demands of Dodd-Frank, the rise of non-subject matter regulators, and the potential politicization of the regulatory process are challenges the industry must face going forward, because there’s no relief in sight until housing reform becomes a priority, which most don’t see happening before 2016.