LAS VEGAS, Nev. - Michael Piwowar delivered a clear message to the crowd for his keynote address Tuesday at ABS Vegas 2016.
You’ve got a friend in me.
The Securities and Exchange Commissioner took to the podium in the convention center of the Aria Resort & Casino to express to attendees his admiration for the economic benefits of securitization – and his disagreement with the risk-retention regulatory regime that has enveloped it.
Piwowar criticized federal regulators for enacting credit risk-retention rules required under the Dodd-Frank Act (which Piwowar helped write as the GOP’s Senate Banking Committee’s chief economist in 2010). Piwowar voted against the credit-risk retention standards adopted by the six federal agencies in 2014, which generally require securitizers to keep a minimum 5%, non-hedged credit risk slice in an asset portfolio sold to investors.
The rule is at various stages of enforcement for different asset classes (such as December 2016 for collateralized loan obligations). Piwowar said he objected to the “’one-size-fits-all’ approach” applied to all the differing categories of securitization (with the exception of exempt “qualified” residential mortgage-backed securities), as they were made without regard to differences in risk or the impact the rule would have on the marketplace.
“These were arbitrary choices,” said Piwowar, who was appointed as a Republican member of the SEC by President Barack Obama in 2013. Residential and commercial mortgages, credit-card receivables and auto-loan backed collateral pools each “have distinct and different attributes association with their underlying borrowers,” he stated.
“Rather than carefully examining these attributes to determine an optimal credit risk retention rate for each asset class, prudential regulators in Washington, D.C., took the easy way out – they simply set it as the maximum statutory rate and ignored the authorization from Congress to create lower risk retention requirements or use alternative methods to align interests.”
Echoing the complaints heard from securitization trade groups, Piwowar criticized regulators for not adopting wider use of qualified exemptions to risk-retention for lower-risk securities. “For those of you in the audience who are involved in other types of securitization [outside of RMBS] that had little, if any, part in causing the financial crisis, you are probably wondering why you were unfairly targeted.
“Unfortunately, unlike Las Vegas, what happens in Washington does not stay in Washington.”
Piwowar was not universally opposed to regulatory effort to more tightly govern securitization. He spoke favorably of the SEC’s amendments that revised the Regulation AB disclosure rules in 2014, which govern the disclosure, reporting and offering process for ABS’. Those changes were in response to Dodd-Frank regulations for common data format standards for ABS issuers to easily compare similar asset classes and disclose asset- or loan-level data for investor’s due diligence methods.
“In my view, the enhanced disclosure requirements can facilitate better, more informed decision-making by both regulators and investors,” Piwowar said. “The new disclosure should directly reduce informational asymmetries and moral hazard problems.”
Piwowar also discussed advancements by the SEC in mitigating the industry’s “over-reliance” on credit ratings, most notably in removing credit-rating references from the SEC’s rulebook – “and therefore, any implied government seal of approval of credit ratings,” he said. He believes the rules help encourage investors to use other tools and benchmarks beyond credit ratings in examining trade opportunities.