U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

23–717 PDF 2017

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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

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 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

(V) 

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 

(1) 

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. 

2 

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 evermore 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 DoddFrank’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. 

3 

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. 

4 

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 

5 

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 shortterm 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 muVerDate Nov 24 2008 17:33 Jul 14, 2017 Jkt 023717 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\23717.TXT TERI
6 

nicipalities, 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 shortterm 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. 

7 

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. 

8 

The result? CLO formation dropped 20 percent last year. Secondhalf 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. 

9 

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 assetbacked 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 triVerDate Nov 24 2008 17:33 Jul 14, 2017 Jkt 023717 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\23717.TXT TERI
10 

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. 

11 

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 brokerdealer 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 

12 

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 

13 

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 DoddFrank 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 DoddFrank. 

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. 

14 

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. 

15 

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 mortgagebacked 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 

16 

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 overweight 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. 

17 

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, singleborrower 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 

18 

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 singleasset, 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 

19 

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 originateto-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? 

20 

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 

21 

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. 

22 

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. 

23 

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 

24 

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? 

25 

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. 

26 

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 mortgagebacked securities? 

Mr. RENNA. Certainly, they were encouraging a lot of federallyguaranteed 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. 

27 

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? 

28 

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 

29 

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 highquality 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 sayVerDate Nov 24 2008 17:33 Jul 14, 2017 Jkt 023717 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\23717.TXT TERI
30 

ing, 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? 

31 

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. 

32 

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? 

33 

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. 

34 

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 

35 

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, 

36 

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 

37 

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 

38 

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. 

39 

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, singleborrower securitization that has no prudential benefit to it whatsoever. That is going to result in a tax. And you are taxing singleasset, 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. 

40 

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 coops 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 

41 

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, acrossthe-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. 

42 

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. 

43 

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. 

44 

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 senVerDate Nov 24 2008 17:33 Jul 14, 2017 Jkt 023717 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\23717.TXT TERI
45 

ior 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? 

46 

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 assetbacked 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. 

47 

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 DoddFrank 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. 

48 

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. 

49 

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 DoddFrank 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— 

50 

[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.] 

(51) 

A P P E N D I X 

February 24, 2016 

52 


23717.001
53 


23717.002
54 


23717.003
55 


23717.004
56 


23717.005
57 


23717.006
58 


23717.007
59 


23717.008
60 


23717.009
61 


23717.010
62 


23717.011
63 


23717.012
64 


23717.013
65 


23717.014
66 


23717.015
67 


23717.016
68 


23717.017
69 


23717.018
70 


23717.019
71 


23717.020
72 


23717.021
73 


23717.022
74 


23717.023
75 


23717.024
76 


23717.025
77 


23717.026
78 


23717.027
79 


23717.028
80 


23717.029
81 


23717.030
82 


23717.031
83 


23717.032
84 


23717.033
85 


23717.034
86 


23717.035
87 


23717.036
88 


23717.037
89 


23717.038
90 


23717.039
91 


23717.040
92 


23717.041
93 


23717.042
94 


23717.043
95 


23717.044
96 


23717.045
97 


23717.046
98 


23717.047
99 


23717.048
100 


23717.049
101 


23717.050
102 


23717.051
103 


23717.052
104 


23717.053
105 


23717.054
106 


23717.055
107 


23717.056
108 


23717.057
109 


23717.058
110 


23717.059
111 


23717.060
112 


23717.061
113 


23717.062
114 


23717.063
115 


23717.064
116 


23717.065
117 


23717.066
118 


23717.067
119 


23717.068
120 


23717.069
121 


23717.070
122 


23717.071
123 


23717.072
124 


23717.073
125 


23717.074
126 


23717.075
127 


23717.076
128 


23717.077
129 


23717.078
130 


23717.079
131 


23717.080
132 


23717.081
133 


23717.082
134 


23717.083
135 


23717.084
136 


23717.085
137 


23717.086
138 


23717.087
139 


23717.088
140 


23717.089
141 


23717.090
142 


23717.091
143 


23717.092
144 


23717.093
145 


23717.094
146 


23717.095
147 


23717.096
148 


23717.097
149 


23717.098
150 


23717.099
151 


23717.100
152 


23717.101
153 


23717.102
154 


23717.103
155 


23717.104
156 


23717.105
157 


23717.106
158 


23717.107
159 


23717.108
160 


23717.109
161 


23717.110
162 


23717.111
163 


23717.112
164 


23717.113
165 


23717.114
166 


23717.115
167 


23717.116
168 


23717.117
169 


23717.118
170 


23717.119
171 


23717.120
172 


23717.121