With help from encouragingly high places, the securitization industry heralded a swift victory over several undoubtedly detrimental provisions in the Employee Abuse Prevention Act (S. 2798/H.R. 5221), which was to be brought to the floor on Sept. 19 by Sen. Richard Durbin (D-Ill.) and Rep. William Delahunt (D-Mass.).
In just a few short months, several parties - ranging from the Bond Market Association to the private sector to academia - submitted comment letters to Sen. Durbin and others in positions of influence. Most significantly, on the day the bill would go before the Senate Judiciary Committee, the President's Working Group on Financial Markets submitted its own letter, signed by none other than Federal Reserve Chairman Alan Greenspan, Treasury Secretary Paul O'Neill, Securities & Exchange Commission Chairman Harvey Pitt, and Commodity Futures Trading Commission Chairman James Newsome, according to sources.
While securitization itself was not the primary focus of all parties involved, an overwhelming number of letters expressed strong opposition to the several specific provisions that would have severely hindered an ABS/MBS trust's claim on securitized assets following a corporate bankruptcy.
Instead of bringing the bill to the floor, Sen. Durbin proposed to introduce an amendment that would essentially strike out the questionable provisions, specifically Sections 102, 103, 105, and 203 (see next page for the American Bankruptcy Institute's synopsis of sections 102 and 103, targeted in the commentary letter from the American Securitization Forum).
"The issues that Senator Durbin is trying to address are issues that no one in this industry, or probably any other industry, would be opposed to," said Michael Williams, vice president for legislative affairs at the BMA and primary author of the BMA's comment letter to Durbin. "However, the way he sought to address it would fundamentally undermine this market."
Durbin's aim, clearly a post-Enron Corp. concern, is to protect "employees and retires from corporate practices that rob them of their earnings and retirement savings when businesses collapse into bankruptcy," noted law professors in a collaborated commentary.
The ASF's reponse was "smartly drafted," devoting most of its space to rally the economic benefits of securitization to consumers and corporations alike, noted one attorney not affiliated with the Forum.
In addition to pointing out that ABS/MBS effects "lower borrowing costs for individuals" and provides "availability of capital to make new loans," the ASF closes its argument with a comment on pension fund investors. The Forum contends that, should the provisions be passed, "investors will lose safe and attractive investment opportunities, and, because MBS/ABS account for approximately 90% of the non-governmental triple-A rated securities outstanding, pension funds in particular will be directly and negatively affected."
"It was very well written from a strategic standpoint," the non-affiliate added. "Although it's hard to conceive of credit card rates being any higher."
A wealth of influence
In the current post-Enron regulatory environment, the potential for unintended adverse impacts on securitization has never been greater.
"While the industry should be congratulated for its adept handling of this threat, the fact that we're fighting to preserve the status quo shows how far the political tides have changed since the late 90s, when we were expecting a general exemption for securitizations to be adopted under the bankruptcy code," commented Glenn S. Arden, global head of securitization at Jones Day in New York.
Still, the immediacy with which organizations responded to the bill was impressive, as well as the volume of responses concerned with the potential disruption to the financial markets. The following illustrates a rough timeline of the events following the inception of the Durbin's bill:
JUL. 28: Bond Market Association learns bill exists.
AUG. 20: BMA formulate a response Takes issue with sections 102, 103, 105.
AUG. 30: Options Clearing Corporation submits letter to Sen. Durbin, as well as the National Conference of Commissioners on Uniform State Laws, with a focus 102, 103, and 105, particularly as it effects the UCC.
SEPT. 3: Group of professors submits report detailing historical development of existing laws relative to securitization and repurchase agreements.
SEPT. 6: Commodity Futures Trading Commission submits letter, as well as the Chicago Board of Trade Clearing Corp. and Chicago Mercantile Exchange. The New York Clearing Corp. cosigns a letter with the New York Mercantile Exchange
SEPT. 10: Financial Services Roundtable and American Bankers Associations submits letter. Parties concerned with the real estate market submit letter, co-signed by Housing Round Table, Fannie Mae, Freddie Mac, Washington Mutual, and others.
SEPT. 12: International Swaps and Derivatives Association (ISDA) submits letter relative to the same sections.
SEPT. 13: The American Financial Services Association submits. The Global Documentation Steering Committee (GDSC), a working group of the N.Y. Federal Reserve Bank, submits to a letter to the President's Working Group on Financial Markets, urging the group to get involved with the issue.
SEPT. 16: American Securitization Forum submits letter.
SEPT. 19: Presidents Working Group submits letter, signed by Treasury Sec. Paul O'Neill, SEC Chairman Harvey Pitt, Fed Chairman Alan Greenspan, and CFTC Chairman James Newsome.
The tone has changed at others levels as well, particularly as the mainstream press is educated in securitization. Last week, The Economist wrote on the potential impacts on securitization if the Employee Abuse Protection Act was signed into law as proposed, referring to the Act as "a virtuous-sounding bill bouncing around Congress that could undermine the legal foundation of the trillion-dollar asset-backed securities market. Asset-backed finance, for all its flaws, plays a huge role in reducing the borrowing costs of American corporations, and of the average citizen too."
Arguably, this is a wide step from the general treatment securitization received by other highly visibly publications earlier in the year (via articles and Op-Ed pieces), which failed, even at the basest level, to differentiate between commonplace securitization and the transactions Enron was concocting.
"I wouldn't call it a major shift from earlier this year, when all of the Enron hoopla had full stride, but I think what you're finding now is that a lot of the publications are looking at the underlying, as opposed to the surface, when they're looking at these issues," said the BMA's Williams. "In this current environment, it's critical that occurs."
At some level, the public has taken a crash course in securitization, and to some extent has begun recognizing the market as an enormous provider of liquidity to consumers and corporations - and a means of risk diversification - as opposed to a string of shady, behind-the-scene deals that chief financial officers structure for their personal gain.