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88–528 PDF 2014

THE DODD-FRANK ACT’S IMPACT 

ON ASSET-BACKED SECURITIES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 26, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–66 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

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 

MICHAEL G. GRIMM, New York 

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 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

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 

GARY C. PETERS, Michigan 

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 

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 

SPENCER BACHUS, Alabama 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

LYNN A. WESTMORELAND, Georgia 

BILL HUIZENGA, Michigan 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

KEITH ELLISON, Minnesota 

MELVIN L. WATT, North Carolina 

BILL FOSTER, Illinois 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

DANIEL T. KILDEE, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 26, 2014 ............................................................................................ 1 

Appendix: 

February 26, 2014 ............................................................................................ 29 

WITNESSES 

WEDNESDAY, FEBRUARY 26, 2014 

Coffey, Meredith, Executive Vice President, Loan Syndications and Trading 

Association ............................................................................................................ 8 

Levitin, Adam J., Professor of Law, Georgetown University Law Center .......... 9 

Quaadman, Tom, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 11 

Vanderslice, Paul, Managing Director, Citigroup, on behalf of the CRE Finance Council ....................................................................................................... 13 

Weidner, Neil J., Partner, Cadwalader, Wickersham & Taft, on behalf of 

the Structured Finance Industry Group (SFIG) ................................................ 15 

APPENDIX 

Prepared statements: 

Coffey, Meredith ............................................................................................... 30 

Levitin, Adam J. ............................................................................................... 46 

Quaadman, Tom ............................................................................................... 65 

Vanderslice, Paul .............................................................................................. 73 

Weidner, Neil J. ................................................................................................ 168 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the National Association of REALTORS® ................. 196 

Barr, Hon. Andy: 

Written statement of First Federal Savings Bank ........................................ 197 

Quaadman, Tom: 

Written responses to questions submitted by Representative Ross ............. 199 

Vanderslice, Paul: 

Written responses to questions submitted by Representative Ross ............. 212 

Written responses to questions submitted by Representative Mulvaney .... 213 

Written responses to questions submitted by Representative Garrett ........ 216 

(1) 

THE DODD-FRANK ACT’S IMPACT 

ON ASSET-BACKED SECURITIES 

Wednesday, February 26, 2014 

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 2:37 p.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Hurt, Huizenga, Stivers, Mulvaney; Maloney, Sherman, Lynch, Himes, Peters, Foster, 

and Kildee. 

Ex officio present: Representative Hensarling. 

Also present: Representative Barr. 

Chairman GARRETT. Good afternoon, everyone. Today’s hearing 

of the Subcommittee on Capital Markets and Government Sponsored Enterprises is hereby called to order. Today’s hearing is entitled, ‘‘The Dodd-Frank Act’s Impact on Asset-Backed Securities.’’ 

And we welcome the members of the panel. 

But before we hear from the panel, we will have opening statements. And I will yield myself 5 minutes. 

Today, we are here to examine, as I say, the impact of the DoddFrank Act on asset-backed securities (ABS). And we are privileged 

to have this panel of great witnesses. I would like to welcome all 

of our witnesses and thank them for agreeing to testify about the 

impact of this law on the $3 trillion ABS market. These securities 

are arguably the most important mechanism that American companies have to fund their operations, as well as the way nearly all 

homes and commercial properties are financed. 

In many ways, Dodd-Frank is a perfect example of several unfortunate trends in the way that Congress and the regulators choose 

to deal with our Nation’s problems. However, increasingly, whenever something goes wrong the knee-jerk reaction of Congress and 

the regulators seems to be to demand that the Federal Government 

do something, anything about it. Obviously, the 2008 financial crisis was a calamity that we are still recovering from today. 

But as Representatives, we have a duty to understand what happened and see if there was a way the financial system could have 

been more stable. Unfortunately, we did not take the time to think 

through the various unintended consequences that could arise before passing Dodd-Frank, and so now we are dealing with the repercussions. So 4 years later, the evidence is mounting that DoddVerDate Nov 24 2008 12:35 Aug 26, 2014 Jkt 088528 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\88528.TXT TERRI
2 

Frank is a disaster for many sectors of the financial system, especially for asset-backed securitization. While our focus today is mitigating the worst of these consequences, I hope we as legislators 

will learn some lessons from this experience. 

You see, successful government regulation is a difficult matter, 

especially when it touches on something as complicated and interconnected as our financial system. Passing bills without a more 

complete understanding of their impact, or for the sake of showing 

our constituents that we are doing something, is, in fact, a recipe 

for disaster. As the saying goes, ‘‘Act in haste, repent at leisure.’’ 

And so, we are here today about helicopter parents, who hover 

over their children making sure they never do anything dangerous. 

Today, we seem to have a Congress that functions like helicopter 

parents, and a regulatory system constantly worried that somewhere somebody might be putting their money at risk. The American people are not the Government’s children. Investors don’t need 

Congress or the Federal Reserve (Fed) or the Consumer Financial 

Protection Bureau (CFPB) to keep them safe. Risk-taking is the 

reason our markets exist, and without risk there can be no innovation, no improvement, and no prosperity. Sometimes, these risks 

pay off, and sometimes they don’t. But win or lose, they serve a 

purpose in steering capital towards it most productive uses. 

Our financial markets are not a T-ball league. There is no way 

everyone can be a winner. We will inevitably be poorer as a society 

if we stifle such risk-taking or shift the negative consequences onto 

the taxpayers. With Dodd-Frank and practically every other major 

law passed since 2008, we have increased the regulatory burden on 

the private sector. That burden falls most heavily on small- and 

mid-sized businesses, who are the biggest drivers of innovation and 

job creation in our economy. 

Yet, we keep making it more expensive and more complicated 

and legally risky to start, or operate, a business. An outside observer might even conclude that we have decided that entrepreneurs and private markets were all a bad thing and we are 

passing laws designed to discourage them. At the same time, we 

give preferential treatment to government-backed financing. And 

so, over time, this different treatment will lead to fewer jobs, less 

innovation, a less stable economy, and greater losses to taxpayers. 

It will also lead to more command and control from Washington, 

and more crony capitalism, where the well-connected get all the 

benefits. So Dodd-Frank takes a lowest common denominator approach to all aspects of the economy and especially to the ABS 

market. In terms of risk retention, all types of ABS are treated the 

same, as if they were subprime market mortgages, backed securities, or synthetic CDOs—the worst of the worst. 

Perhaps the best example of this misguided approach to regulation is the treatment of collateralized loan obligations or (CLOs). 

CLOs are a type of ABS that are backed by syndicated loans to 

businesses, and they are a major source of financing to mid-sized 

companies that cannot cost-effectively issue corporate bonds. There 

are many different explanations for our financial crisis, but I have 

yet to hear someone claim the CLOs were responsible. And yet, the 

reproposed rules from Dodd-Frank risk retention gives the same 

broad-brush treatment to CLOs as it does to more risky types of 

3 

securities. By all accounts, then, Dodd-Frank will effectively kill off 

the $300 billion CLO market by making it prohibitively expensive 

to arrange and manage a CLO. 

So, why are we destroying this vitally important asset class? It 

makes no sense at all. I can only assume that CLOs just got swept 

up with all the other three-letter acronyms for financial products. 

This market funds businesses of different sizes all across the country. For example, in my district we have a major car rental company—in my district is a company that uses CLOs to finance its 

operations. Yet here we are today, sorting out the unintended consequences of a poorly written law and trying to prevent a totally 

artificial collapse of a major piece of the ABS market. 

I am hopeful that we can work in a bipartisan manner to fix 

these regulatorily-created problems in this important market. And 

in the testimony today, I hope that our witnesses will provide us 

with concrete ways to correct these regulatory obstacles and ensure 

that these markets are still able to flourish. It is time that we stop 

being the helicopter Congress and start treating financial markets 

participants like the adults that they are. 

And with that, I yield back, and now yield to the gentlelady from 

New York. 

Mrs. MALONEY. Okay, thank you so much, Mr. Chairman. And 

I thank all my colleagues and I welcome all our panelists. Thank 

you all for being here. I think it is worthwhile to examine DoddFrank’s impact on the securitization markets, because these are 

complicated markets that are constantly evolving. These markets 

are also very important to our economy. They provide financing for 

families buying a home, businesses that want to expand, and students who want to get an education. 

However, we also need to keep in mind that some of these securities were at the center of the financial crisis that cost our economy 

a staggering $16 trillion. Too often, the incentives of the lender, 

sponsor, and investor were badly misaligned, with disastrous consequences. We need to prevent these toxic securities from coming 

back, without unduly disrupting the availability of credit. DoddFrank required the banks sponsoring the asset-backed security to 

have some kind of skin in the game which gives them an incentive 

to monitor the quality of the loans being securitized. 

It is important to remember that this was not a novel idea. In 

some markets, investors in asset-backed securities had been requiring this for years. Dodd-Frank also aimed to bring greater transparency to securitization markets by requiring disclosure of detailed loan-level information so that investors know what they are 

buying. 

The regulators, in implementing Dodd-Frank, have attempted to 

strike a careful balance, and I applaud them for their thoughtful 

approach. The regulators have been willing to make changes to the 

rule when unintended problems come up, like they did when the 

Volcker Rule inadvertently harmed community banks that owned 

certain CDOs, for example. 

The regulators are now considering another tweak to the Volcker 

Rule that would provide targeted relief to CLOs. And both Chair 

Yellen and Governor Tarullo at our last hearing said that this 

issue is at ‘‘the top of the list,’’ for regulators. I am pleased that 

4 

regulators are willing to make these kinds of adjustments, but I 

also hope that the regulators will be just as quick to adjust their 

rules to close loopholes that the markets find and to prevent bad 

actors from evading the rules. I very much look forward to hearing 

from our witnesses on the real-world impact of these rules. 

And I reserve the balance of my time for any other Member who 

would like to speak on this after your side. Or go ahead. Mr. Sherman, I yield to you for the rest of my 5 minutes. Thank you. 

Mr. SHERMAN. I thank you for yielding. At these hearings, we 

need to focus on whether we have reached the proper definition of 

what securities and other assets need to be divested, whether we 

have the right time frame for such divestiture to take place, and 

maybe we will explore whether the bank renouncing certain ownership assets, certain indices of ownership, certain rights they have 

under some of these agreements, give them an opportunity to continue to hold them. 

As to the chairman’s discussion of helicopter parents, we have 

entities that are too-big-to-fail. We had better helicopter over them. 

Because if they go down, they will take the whole family with 

them. The way to deal with them is to break them up. Too-big-tofail is too-big-to-exist. To tell them that they should engage in any 

kind of risky activity and we won’t get involved would be an appropriate statement if we hadn’t lived through 2008 and experienced 

what this Congress does when those that are too-big-to-fail are failing. 

So if we are going to allow too-big-to-fail entities to exist, we are 

going to have to hover over them with a helicopter. I think the best 

solution is that too-big-to-fail is too-big-to-exist, and that way we 

can really end this excessive government involvement. Finally, one 

of our witnesses, Mr. Levitin, will point out that Section 939F of 

Dodd-Frank, the Franken-Sherman Amendment, has simply not 

been implemented. And this goes to the heart of why we had the 

meltdown. 

The credit ratings agencies were giving triple-A to alt-A, and any 

pension manager who didn’t invest in them was an underperformer. And until we deal with the credit rating agencies, and the 

fact that the umpire is paid by one of the teams, we are going to 

have meltdowns in one area or another. And unless I get the chairman to cosponsor our bill to end too-big-to-fail, those meltdowns 

are going to involve the taxpayer. 

I yield back. 

Chairman GARRETT. The gentleman yields back. I have not yet 

decided to cosponsor your bill to end too-big-to-fail because I know 

that this committee passed Dodd-Frank, which we were told already ended too-big-to-fail in this country. 

With that, I will now yield to the vice chairman of the subcommittee, Mr. Hurt, for 21⁄2 minutes. 

Mr. HURT. Thank you for holding today’s subcommittee hearing 

on the impact of Dodd-Frank on asset-backed securities. I thank 

the witnesses for being here, and I look forward to your testimony. 

In the wake of Dodd-Frank, we have continued to see costly unintended consequences arise from regulations that were poorly devised and implemented. These regulatory impacts represent real 

costs to consumers, both families and small businesses on Main 

5 

Streets in every congressional district. With the recently-finalized 

Volcker Rule, we began to see these consequences almost immediately after it was released, as community banks were faced with 

taking large write-downs. While the joint regulators eventually corrected this error, there are still several other Volcker-related issues 

yet to be resolved, most notably with respect to CLOs and assetbacked securities. 

In Virginia’s 5th District, my District, many companies rely on 

the CLO market to finance their operations, including a financial 

information firm headquartered in Charlottesville, with over 2,600 

employees, and an auto parts manufacturer in Southside. These 

companies, however, like so many others across the country face increased costs as the CLO market reacts to the Volcker Rule’s treatment of CLOs as covered funds. I think most would be hardpressed to characterize financing the operations of these Virginia 

companies as ‘‘hedge fund-style high-risk trading.’’ 

Yet according to one of the Volcker Rule’s Senate sponsors, the 

purpose of the provision was to put a firewall between banks in exactly these activities. While that may have been the original intent, 

we now see how a flawed rule, written in a flawed process, can extend well beyond its original confines and impact our communities. 

I appreciate the bipartisan group of Members who want to correct 

this misapplication of the Volcker Rule, and I look forward to its 

resolution. And I look forward to the testimony of the witnesses. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman GARRETT. Mr. Peters is now recognized for 3 minutes. 

Mr. PETERS. Thank you, Mr. Chairman, and thank you to our 

witnesses for being here today. And certainly, I would like to thank 

Chairman Garrett and Ranking Member Maloney for convening 

this important hearing. 

I was first elected in 2008, which was during the height of the 

financial crisis. And our Nation at the time was shedding 800,000 

jobs per month, and many small businesses in my home State of 

Michigan found themselves unable to access the capital and credit 

that they needed to continue operations, let alone grow and create 

jobs. During my time in Congress, my top priority has been ensuring that small businesses have the tools they need to grow, especially access to capital. 

There certainly is no silver bullet, and our Nation’s entrepreneurs rely on innovative programs like those implemented by 

the States, with the support of funding from the State Small Business Credit Initiative, or backed by the SBA as well as community 

banks, credit unions, funding from the markets through initial public offerings, venture capital, private equity firms, and many others. Collateralized Loan Obligations, or CLOs, are part of the spectrum of financing that keeps Michigan businesses moving forward. 

Michigan industries that currently rely on CLOs show the diversity 

of Michigan’s economy and include not just auto manufacturing 

and parts suppliers, but media and communications firms, textile 

and apparel manufacturers, retail and supermarkets, and utilities, 

as well as gaming and hospitality. 

We need to work together to ensure that Dodd-Frank implementation protects consumers and our economy as a whole without cutting off access to capital to small businesses. We also can’t go backVerDate Nov 24 2008 12:35 Aug 26, 2014 Jkt 088528 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\88528.TXT TERRI
6 

wards. We can’t go back to allowing the use of government-insured 

money to make speculative bets on bets and then on further bets 

that threaten the entire financial system. We can’t go back to shedding millions of middle-class jobs because of Wall Street overreach. 

Today, I hope our witnesses will address how we can find the balance in our markets we need to protect consumers, while maintaining liquidity and robust access to capital for our small businesses. 

I hope our witnesses touch on how small businesses make use of 

CLOs, the impact a disruption on the CLO market would have on 

them, and where these firms would find alternative financing in 

the event of such a disruption. Most importantly, I hope that our 

panel and my colleagues focus on solutions. 

Thank you, and I yield back. 

Chairman GARRETT. Thank you. Mr. Barr is recognized for 21⁄2

minutes 

Mr. BARR. I would like to thank the chairman for hosting this 

hearing today, and for the opportunity to analyze the discussion 

draft that I have put forth to fix an overreach by regulators in implementing the Dodd-Frank law. Based on concerns expressed by 

committee members on both sides of the aisle in a February 5th 

hearing with the regulators, as well as a subsequent letter sent to 

the regulators by over a dozen Democratic members of this committee, I am extremely hopeful that we can work together in a 

thoughtful and bipartisan way to fix the chilling effect the Volcker 

Rule will have in providing financing to American companies 

through Collateralized Loan Obligations, better known as CLOs. 

I am interested in getting this issue right because this is about 

jobs, business growth, and economic development in communities 

throughout the country. For example, CLO financing has been instrumental in building an infrastructure to bring cell phone service 

to rural areas. It has been used by companies in my district like 

Tempur-Pedic to raise funds fund to grow their business. In Kentucky, CLO financing has even helped companies which mine coal 

and provide health care. 

Finally, the importance of fixing the Volcker Rule for legacy 

CLOs, those issued before December 31, 2013, has been made clear 

to me by a community bank in Kentucky which considers its investment in CLO debt securities as an important part of the bank’s 

investment portfolio. According to this community bank, if it is 

forced by the Volcker Rule to liquidate its investments in CLOs 

and take losses, ‘‘the consequences could potentially translate to 

hiring freezes and/or layoffs for our employees and higher rates to 

our customers.’’ 

With Volcker, I am concerned that the medicine being prescribed, 

which would involve banks forced to sell billions of dollars of CLO 

paper in a fire-sale scenario, and the loss of credit availability for 

a wide swath of American companies, would be far more damaging 

to the credit markets than the perceived illness which the medicine 

is designed to fix, which would be the highly hypothetical scenario 

of banks ever suffering losses from holding triple-A CLO paper, 

which performed very well during the financial crisis. 

During the February 5th hearing in this committee with the 

Volcker regulators, I asked Federal Reserve Governor Tarullo 

about grandfathering existing CLO investments. I was pleased that 

7 

he responded by saying that he will look at this as the first issue 

on the agenda. As such, I am hopeful that today’s hearing will help 

clarify this issue and what is at stake so that we can fix this unintended discrimination against CLOs as soon as possible. 

Thank you, Mr. Chairman, and I yield back. 

Chairman GARRETT. Thank you. The gentleman yields back. 

The gentleman from Massachusetts, for 2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I am very happy that we 

have an opportunity to discuss the improvements made to the 

Dodd-Frank Act asset-backed securities legislation, the financial 

products that were at the very core of the financial crisis. I know 

this hearing was intended to address Dodd-Frank’s effect on assetbacked securities in general, but I want to express very serious 

concerns about the draft legislation circulated by my friend from 

Kentucky. 

Let me just say at the outset that I have enormous respect for 

the gentleman from Kentucky, and I do believe there is a real opportunity for some much-needed bipartisanship on the issues of 

voting rights for senior debt securities of CLOs and also the way 

Dodd-Frank addresses risk retention on CLOs. As a matter of fact, 

I signed, along with 16 of my Democratic colleagues, a letter to the 

regulators making clear that the voting rights provision in CLO 

contracts should not, on their own, create an ownership interest 

under the Volcker Rule and urging the regulators to provide limited relief to address this issue. 

So I am sympathetic to the concerns from holders of these securities who are worried that they may have to divest them unless they 

get some relief. We are on the same page on that. But the discussion draft goes far beyond the limited relief that we requested. It 

completely exempts CLOs issued before December 31, 2013. And in 

discussions I have had with my staff, along with holders of these 

CLOs, they made very clear to us that it was not necessary to 

grandfather all CLOs issued before the Volcker Rule was finalized. 

They only needed the targeted relief we argued for in our letter. 

So it is unnecessary, and reckless, I think, to expand the scope 

of relief for CLOs beyond what the holders of these CLOs have requested. And I am very concerned that expanding this limited relief will open up the Volcker Rule to gaming by the industry. This 

committee should be very, very cautious about rolling back regulations that are critical to Dodd-Frank reforms before regulators’ ink 

is even dry on those reforms. 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. The gentleman yields back. I believe that 

concludes all of our opening statements at this time. We will now 

turn to our panel. We thank you again for coming. A number of you 

have been here before. And for those of you who have not, and for 

those of you who have and may have forgotten, I always ask that 

you make sure you turn your microphone on, and that you pull the 

microphone as close as you can, because some of us just can’t hear 

anymore. 

And without objection, your entire written statements will be 

made a part of the record. We just ask you to summarize it during 

these 5 minutes. 

8 

I now recognize Ms. Meredith Coffey, executive vice president of 

the Loan Syndications and Trading Association. Thank you for 

being with us, and you are recognized for 5 minutes. 

STATEMENT OF MEREDITH COFFEY, EXECUTIVE VICE PRESIDENT, LOAN SYNDICATIONS AND TRADING ASSOCIATION 

Ms. COFFEY. Thank you, and good afternoon, Chairman Garrett 

and Ranking Member Maloney, and members of the subcommittee. 

My name is Meredith Coffey, and I am executive vice president of 

the Loans Syndications and Trading Association (LSTA). Now, importantly, the LSTA does not represent the CLO market. Instead, 

the LSTA represents the $3 trillion corporate loan market. And our 

concern is how regulation could severely diminish securitization, 

particularly CLOs, and how this could significantly hurt the corporate loan market. 

Critically, this would hurt U.S. companies’ access to loans they 

need to expand, to build factories, to build cellular networks, and 

engage in M&A as they grow and build—create jobs. We are grateful to be here today to testify on how important securitization is 

to lending and to U.S. companies. And, importantly, how regulation, if it is poorly implemented, could decimate this important 

market. Now, as background, U.S. CLOs provide approximately 

$300 billion of financing to U.S. non-investment-grade companies. 

These companies include health care companies like community 

health and HCA; food companies like Del Monte and Dunkin 

Donuts; technology companies that are big, like Dell Computer, 

and small, like Netsmart Technologies; and many, many more. In 

fact, roughly 1,000 companies receive financing from CLOs and 

these companies employ more than 5 million people. It is a very 

important source of financing. 

Unfortunately for these companies, CLOs face existential threats. 

The risk retention rules alone threaten to reduce the CLO market 

by 60 to 90 percent. If the CLO market is reduced so dramatically, 

companies that rely on CLOs could see a substantial shortfall in 

financing. Now, it may be these companies can seek other sources 

of financing. But if so, it will come with a far higher price tag. If 

companies could replace lost CLO capacity it would cost them $2.5 

to $3.8 billion per year to replace the capacity. 

So the choice for U.S. companies, really, would be to do without 

financing or face markedly higher financing costs. Neither bodes 

well for economic growth and job creation. And not only are CLOs 

an important source of financing for 1,000 U.S. companies, they 

have also proven to be safe investments. In the last 20 years, the 

cumulative default rate for CLOs was 0.41 percent. Not one of the 

4,000 triple-A and double-A rated CLO notes defaulted, not one. 

This compares extremely well to almost all other asset classes, 

even investment-grade corporate bonds. So what are the threats to 

CLOs and what are possible solutions? The first major threat is 

that the final Volcker Rule arbitrarily converts investment-grade 

CLO debt securities into the equivalent of equity through an expansive definition of ownership interest. In turn, banks would no 

longer be permitted to hold investment-grade CLO debt. The ramifications are huge. 

9 

U.S. banks hold $70 billion to $80 billion of investment-grade 

CLO notes. Moreover, foreign banks hold another estimated $60 

billion. If banks were forced to sell, which they would be, this 

would materially disrupt the market. In fact, CLO issuance in January dropped nearly 90 percent from year-earlier levels, primarily 

due to concerns around the Volcker Rule. It has recovered somewhat in February. But do be aware, this is because the market participants took comfort that lawmakers, particularly members of 

this committee, are working to resolve this problem. 

We appreciate how seriously the committee takes this issue and 

the bipartisan efforts to ensure American businesses continue to 

get the financing they need. The legislation that Representative 

Barr introduced would provide a prospective solution and would 

provide business borrowers with certainty. And the letter that Representatives Waters and Maloney, and 15 other lawmakers sent, 

has been instrumental in focusing the regulators on fixing this 

problem. We greatly appreciate your effort and your focus on this 

issue. 

But the Volcker Rule is not the only existential threat that CLOs 

face. Risk retention threatens to shutter the CLO market, as well. 

The Dodd-Frank Act requires securitizers to retain 5 percent of the 

credit risk of any ABS. Even though CLOs have no securitizer, as 

defined in Dodd-Frank, the agencies have said the CLO manager 

is the sponsor and thus must purchase and retain 5 percent of any 

new CLO. So for a new $500 million CLO, a manager must find 

$25 million to purchase notes from that CLO. 

Why doesn’t this work? Unlike banks, most CLO managers are 

thinly-capitalized asset managers. They simply do not have the 

capital to invest $25 million to manage each new CLO. And because of this, risk retention would dramatically reduce the market. 

While the agency’s proposed rules do not work for CLOs, we have 

offered a workable alternative. A qualified CLO, which would be 

subject to many of the restrictions and protections, and for which 

managers could purchase and retain 5 percent of the equity of the 

CLO. This should be feasible for agencies and it should permit 

most of the CLO market to survive. Thank you again for inviting 

me to testify, and I would be delighted to expand on any of these 

issues. 

[The prepared statement of Ms. Coffey can be found on page 30 

of the appendix.] 

Chairman GARRETT. Great. Thank you very much for your testimony. 

Professor Levitin, greetings. And you are recognized for 5 minutes. 

STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. It is good to be here again. Good afternoon, Chairman Garrett, Ranking Member Maloney, and members of the subcommittee. Thank you for inviting me to testify. I am here today 

as an academic who studies structured finance. I have no personal 

financial interest in these matters, and I am not speaking on behalf of any organization. 

10 

A key point we should not lose track of in this hearing is that 

structured financial products caused the financial crisis of 2008. 

Mortgage securitizations and CDOs were at the very heart of the 

crisis, and one of the pillars of the Dodd-Frank Act are provisions 

reforming the structured finance market. Unfortunately, Federal 

regulators have been unacceptably slow in implementing the DoddFrank Act’s structured finance provisions. 

Several key rules have not been finalized or, in some cases, not 

even proposed. In particular, the SEC has failed to fulfill its statutory duties under the Franken-Sherman and Merkley-Levin 

Amendments. The SEC does not seem to have internalized that its 

mission is not just investor protection, but also systemic stability. 

Although some rulemakings have been delinquent, regulators have 

finalized one of the most important rulemakings: Regulation VV, 

which implements the Volcker Rule. 

The Volcker Rule prohibits banks from having ownership interests in certain investment funds. The Volcker Rule does this in 

order to prevent Federal Deposit Insurance from leaking out and 

covering speculative investment activity. Bank ownership interests 

in investment funds can give rise to implicit recourse to banks’ balance sheets, and thus to the Deposit Insurance guarantee. This is 

a problem we have witnessed repeatedly in the structured finance 

context for various asset classes. 

Over the past 25 years, banks have repeatedly rescued their 

credit card securitization vehicles. And in 2007, banks brought 

sponsored hedge funds and structured investment vehicles back on 

their balance sheets. As long as banks have ownership interests in 

investment funds, and investment funds include any type of structured product—it is always done through a fund—there will always 

be the specter of an implicit guarantee. 

Accordingly, Regulation VV correctly defines ownership interest 

broadly to include not just formal equity ownership but also functional indicia of ownership: the ability to control an investment 

fund or to share in its profits or losses. This is just what the accounting rules require. The Regulation VV ownership prohibition 

does not apply, however, to funds that invest solely in loans. This 

has resulted in some questions about the status of Collateralized 

Loan Obligations, or CLOs. 

Let’s be clear about what a CLO is. A CLO is a securitization of 

interests in high-yield corporate loans. CLOs do not typically hold 

whole loans. Instead, they contain syndication pieces that are parts 

of multi-million or, quite often, multi-billion dollar high-yield corporate loans. CLOs are not financing small business. They are financing large business. They are providing an important piece of 

the financing for large business, but they are not providing all of 

it. 

Like all securitizations, CLOs involve closed-end investment 

funds. CLOs are also generally actively managed. As closed-end, 

actively-managed, structured investment funds, CLOs are indistinguishable from CDOs, the very instrument that was at the heart 

of the financial crisis. The only difference one can point to is that 

CLOs’ assets are concentrated in corporate loans rather than in 

other assets. Structurally, however, there is no difference between 

11 

a CLO and a CDO, and the CLOs’ markets solid performance in 

the past is not a guarantee of its future performance. 

Regulation VV will necessitate banks to divest ownership interests in some unknown number of legacy CLOs whose assets are not 

restricted solely to loans. But this is no different than any other 

divestment required by Reg VV. And given the liquidity of the CLO 

market and the relatively long divestment window, the divestment 

should not result in a fire sale. To the extent that legacy CLOs are 

a concern, and I do not believe that we have an empirical basis for 

making that conclusion, there are surgical fixes available that do 

not require legislation. 

Going forward, Reg VV will not have an impact on the CLO market. The CLO market has already figured out several transactional 

solutions to enable continued bank investment in the asset class. 

And as Ms. Coffey noted, the CLO issuance is actually up this 

month, after having been down in January. The other major rulemaking that I wish to briefly mention is the credit risk retention 

proposal under Section 941. And I just want to frame it in maybe 

a different way than it is usually thought of. 

I think it is generally accepted that there is a—there can be conflicts of interest between securitization sponsors and securitization 

investors. We have two basic routes in which we can address this. 

We can either try and deal with it ex ante by making securitization 

sponsors essentially partners in the securitization, making them 

buy a piece of the securitization. And that means that they are 

going to have to have some capital for that, which is going to be 

a problem. Or we can try and deal with this on the back end by 

having effective representation and warranty enforcement. 

I am not especially optimistic that we are ever going to get effective back-end enforcement. Therefore, I think we need to be thinking about how we can make risk retention work. Thank you. 

[The prepared statement of Professor Levitin can be found on 

page 46 of the appendix.] 

Chairman GARRETT. Thank you. 

From the U.S. Chamber, welcome back, Mr. Quaadman. You are 

recognized for 5 minutes. 

STATEMENT OF TOM QUAADMAN, VICE PRESIDENT, CENTER 

FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER 

OF COMMERCE 

Mr. QUAADMAN. Thank you, Mr. Chairman, and thank you, 

Ranking Member Maloney. And I would also like to thank the 

members of the subcommittee for your continued leadership on 

issues of importance to Main Street businesses. I would also like 

to take a quick moment to thank Congressman Barr for developing 

legislation to address the CLO issue, as well as Ranking Member 

Maloney for spearheading the letter that was signed by many 

Members asking the regulators to fix the issues. 

The Chamber has been very concerned with the impacts of the 

Dodd-Frank Act on the ability of Main Street businesses to access 

capital. Our view has been, with all the different major regulatory 

pieces of Dodd-Frank and other regulatory initiatives, that they 

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12 

tion with other rulemakings and other initiatives such as Basel III 

and even money market fund reforms. 

Shortly after the Volcker Rule was proposed in December 2011, 

we sent a letter to the regulators asking for such a holistic review 

to see how the Volcker Rule would impact the ability of businesses 

to enter the debt and equity markets and how it would interact 

with other regulations. And we also asked that the regulators conduct an economic analysis. With that letter, we included a survey 

that we had taken of small-, medium-, and large-sized businesses 

on the impacts and impediments and costs of the proposed Volcker 

Rule, at that time, with their ability to access different forms of 

capital. 

And one of the solutions that we proposed at that time was also 

that the regulators hold roundtables. About a month later, after 

that letter was sent in, Governor Tarullo from the Federal Reserve 

testified from this table to the full Financial Services Committee, 

saying that the regulators involved in the Volcker Rule did not understand the marketplace activities and what participants were 

doing in the markets. I am sorry to say, 2 years past that hearing—despite, I think, good faith efforts to change some of the substantive issues with the Volcker Rule—I don’t think the level of understanding of the regulators on marketplace activities has necessarily changed. 

So as you have already heard, CLOs provide $300 billion in financing to small and medium-sized businesses as well as those 

businesses which can’t find financing in other forms. And CLOs 

performed well during the financial crisis versus other 

securitizations. They are different in that the CLO managers have 

skin in the game, and there is an alignment of interests with the 

investor communities. 

However, as we have seen, the CLOs have been impacted by the 

risk retention rules as well as by the Volcker Rule. These impacts 

are no longer theoretical. In January, Bloomberg reported that 

CLO issuances in the United States are down by at least 60 percent, and that CLO activity is now beginning to migrate over to 

Europe. So, there are solutions to the problems. As I said earlier, 

the regulators, in terms of the procedure in developing DoddFrank, played fast and loose with what their legal requirements 

were. However, we believe that the legislation proposed, or the discussion draft put forward by Congressman Barr does put a little bit 

of a stronger public policy statement to the regulators to get this 

problem fixed, though I do believe we have a unity of interests here 

to get the problem fixed. 

These issues are not partisan, and we would hope that both sides 

can agree to a solution. Additionally, as I said, we thought these 

issues should have been resolved during the rulemaking process 

itself. While we think it is a good first step that the agencies have 

formed an interagency working group in the development of the 

Volcker Rule implementation issues, we also believe that there 

should be a working group of market participants; financial institutions; small, medium, and large businesses; global businesses; institutional investors; and others that can work with the regulators 

to actually ‘‘war game’’ Volcker throughout the conformance period 

13 

in order to discover any unintended consequences. And then to also 

craft solutions to those unintended consequences. 

As we have seen with CLOs today, as we had the hearing a couple of weeks ago with trust-preferred bonds, we are sort of getting 

into a ‘‘Whack-a-Mole’’ situation, where issues keep popping up one 

after the other. The other situation I think we all want to avoid 

is that we all wake up on July 23, 2015, when the conformance period is ended, and markets are volatile and businesses don’t have 

access to different products because these unintended consequences 

had not been worked out. 

We also believe the interagency working group, as well as this 

market participant working group, should report to the committee 

and the subcommittee regularly as to their progress. And I am 

happy to take any further questions you have. 

[The prepared statement of Mr. Quaadman can be found on page 

65 of the appendix.] 

Chairman GARRETT. The gentleman yields back, and I thank the 

gentleman. 

Mr. Vanderslice, you are now recognized. Welcome, first of all, to 

the panel. And you are now recognized for 5 minutes for your testimony. 

STATEMENT OF PAUL VANDERSLICE, MANAGING DIRECTOR, 

CITIGROUP, ON BEHALF OF THE CRE FINANCE COUNCIL 

Mr. VANDERSLICE. Thank you, Chairman Garrett and Ranking 

Member Maloney, for giving me the opportunity to testify today. I 

am co-head of the U.S. CMBS group, and head of the commercial 

mortgage distribution efforts for Citibank global markets. However, 

I am testifying today on behalf of the Commercial Real Estate Finance Council, or CREFC. CREFC members include multi-family 

and commercial lenders, loan and bond investors, and servicing 

firms of all types. 

I will focus my comments today on the recently reproposed risk 

retention rules and CMBS. CMBS is an integral component of commercial real estate lending because it expands the pool of available 

loan capital beyond what balance sheet lenders, mostly banks and 

insurance companies, can contribute. In 2013, CMBS provided almost 25 percent of all CRE financing. That is over $80 billion in 

loans that were made. CMBS also provides about 34 percent of all 

CRE loans made in tertiary markets, and 24 percent of the loans 

made in secondary markets. 

No other lending source comes close to servicing these markets 

to that extent. To give you a better sense of the significance of this 

industry, Mr. Chairman and Ranking Member Maloney, in your 

combined MSA alone, there are thousands of properties with outstanding CMBS loans totaling over $66 billion. And that is outstanding today. The proposed CMBS retention rules impose a burden on borrowers that is projected to appreciably increase their 

cost of funds. 

A strong consensus across all CREFC constituencies was reached 

on a set of recommendations to the risk retention rules as reproposed this past August. CREFC and its members are supportive of 

the goal of risk retention in the proposed rules. However, we believe strongly that the rule should provide optionality and flexiVerDate Nov 24 2008 12:35 Aug 26, 2014 Jkt 088528 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\88528.TXT TERRI
14 

bility for achieving these goals. Simply put, there is more than one 

means to an end. 

Allowing our industry this optionality and flexibility will allow 

risk retention to be achieved fully, but with the least possible 

amount of marketplace disruption. Today, I will focus on three key 

areas: single borrower-single credit transactions; b-piece structure; 

and qualified commercial real estate (QCRE) parameters. First, 

single borrower-single credit transactions (SBSC): There is a strong 

consensus across all CREFC constituencies to completely exempt 

single-borrower-single credit deals from the retention regime. SBSC 

deals involve only one loan, or a pool of cross-collateralized loans 

that essentially function as one loan. SBSC transparency is extremely high because granular loan details are reported to potential investors, and SBSC loss experience has been exceedingly low. 

Furthermore, because these transactions effectively contain only 

one loan, it is much easier for institutional investors to evaluate 

the credit of the transaction before investing, and they have broader access to data because the deals are typically done in the private 

market. 

Second, b-piece structure. For CMBS only, the proposed rules 

allow a third-party b-piece investor to buy the first-loss position to 

bear the retention obligation. The actual amount of retention required under the reproposed rules is quite significant, effectively 5 

percent of the cash proceeds or 5 percent of the fair value of the 

bond sales, which is about double the capital investment currently 

made by b-piece buyers in deals that we are doing today. To address this, the regulations allow two BP buyers to buy the retention obligation and co-invest side-by-side. 

Although this helps to address access to capital, it creates a host 

of other issues for the b-piece investors. To address these issues, 

CREFC recommends allowing a senior subordinate structure for bpiece investors. This would still accomplish the retention regime 

objectives, but would be workable for the industry without materially increasing the cost of funds to the borrowers. 

Third, QCRE parameters. The proposed rules would exempt 

qualified commercial real estate (QCRE) loans from the retention 

regime if specified underwriting parameters are fulfilled. The 

QCRE goal is to reward conservative underwriting. There was a 

broad consensus among CREFC members, including among investors, that QCRE parameters should be modified by making certain 

changes to the proposed QCRE loan parameters. Based on historical data from all CMBS deals since 1997, our recommendations 

would expand the universe of QCRE-eligible loans from around 3 

percent of CMBS loans to about 15 percent. 

Using the same data, the cumulative loss percentages for those 

qualifying loans would fall to less than 1 percent. This is all in contrast to the other qualifying asset exemptions under which the vast 

majority of assets will qualify. Mr. Chairman, we want to make 

risk retention work, not eliminate it. And we believe that the recommendations I have outlined today, and that CREFC has advanced in its comment letters, would help accomplish that objective. 

And I would be happy to answer any questions you may have. 

15 

[The prepared statement of Mr. Vanderslice can be found on page 

73 of the appendix.] 

Chairman GARRETT. And I thank the gentleman for your testimony. 

Mr. VANDERSLICE. Thank you. 

Chairman GARRETT. Last, but never least, Mr. Weidner is recognized for 5 minutes. 

STATEMENT OF NEIL J. WEIDNER, PARTNER, CADWALADER, 

WICKERSHAM & TAFT, ON BEHALF OF THE STRUCTURED FINANCE INDUSTRY GROUP (SFIG) 

Mr. WEIDNER. Thank you. 

Chairman GARRETT. You are welcome. 

Mr. WEIDNER. Chairman Garrett, Ranking Member Maloney, 

and members of the subcommittee, my name is Neil Weidner. I am 

a partner in the capital markets group of Cadwalader, Wickersham 

& Taft. I have spent the majority of my 22 years of practice in the 

field of structured finance, and I have been actively involved in the 

CLO market since the late 1990s. 

Today, I would offer testimony on behalf of the Structured Finance Industry Group, or SFIG, a trade industry group with over 

240 institutional members that focuses on improving and strengthening the broader structured finance and securitization market. 

Securitization touches the lives of your constituents on a daily 

basis, and provides economic benefits that help Main Street to access affordable credit. SFIG believes in a well-regulated and liquid 

securitization marketplace for all asset classes. 

I am here today to discuss two specific aspects of the Act which, 

if enforced in the current form, will have an adverse impact on individuals and businesses in your communities. The clearest example of this is the effect that the final implementation of the Volcker 

Rule and the proposed risk retention rules are having on the CLO 

market. The uncertainty due to Volcker is negatively affecting the 

marketplace today. Analysts have predicted that 2014 estimates of 

CLO issuance would drop by 18 percent, to $55 billion. 

This equates to a loss of up to $10 billion in financing to U.S. 

companies. The proposed credit risk retention rules also present a 

serious threat to the long-term viability of the CLO marketplace. 

If implemented as currently proposed, CLO issuance and the 

amount of credit provided to U.S. businesses could be reduced by 

75 percent or more. To put this in context, U.S. companies that employ 7.5 million people use the CLO marketplace to expand their 

businesses, including opening new factories, paying suppliers’ invoices, or simply making payroll. 

Without significant changes to the proposed regulatory framework, these companies, such as ManorCare, Pinnacle Foods, and 

Berry Plastics may lose the ability to receive affordable financing 

provided by the CLO marketplace. We appreciate the recent attention that Federal agencies and lawmakers on both sides of the aisle 

have given these issues. The market has reacted positively to the 

bipartisan focus of this committee and, thankfully, largely to your 

efforts and the prioritization by the regulators. 

The CLO market experienced a slight upturn this month, that 

was alluded to. But as such, we urge the committee to maintain 

16 

the momentum towards developing a near-term solution for the 

Volcker Rule. And absent a proper solution, there is a strong concern that the market will quickly contract again. We also look forward to continuing our constructive dialogue with the regulators on 

the proposed risk retention rules. 

Without a workable solution for retention, the long-term viability 

of the CLO marketplace has also been called into question. However, SFIG believes there are simple, straightforward solutions for 

providing regulatory clarity to the participants in the CLO marketplace. With respect to Volcker, SFIG has asked for regulatory clarity regarding the definition of ownership interests as it relates to 

debt securities in CLOs. This approach does not require the reopening of the Volcker Rule. 

We simply ask that regulators provide additional interpretive 

guidance, which can be in the form of a simple FAQ. Such an approach would help provide certainty both on a go-forward basis, 

and for existing CLOs, commonly referred to as legacy CLOs—that 

this issue, were this issued prior to the regulation—that were legacy CLOs that were issued prior to regulation. 

In terms of risk retention, SFIG believes both the structured finance and alignment of interest of participants had contributed to 

the CLOs strong performance before, during, and after the crisis. 

In fact, from 1993 to 2012, no CLO debt security rated higher than 

A has ever experienced a principal loss. Such tranches represent up 

to 75 percent of the capital structure of a CLO. These are tranches 

that are bought by banks, including community banks such as the 

Federal Savings Bank of Elizabethtown, Kentucky. 

Nevertheless, we continue to work constructively with the regulators to create flexibility to satisfy the retention requirements 

through an array of options as have been proposed for other asset 

classes. Specifically, SFIG believes that the agencies should consider adopting both a third-party retention option for CLO holders, 

as has been proposed for CBS, and a qualified CLO option. SFIG 

believes that these options offer flexibility for the industry in meeting retention requirements. 

Further, SFIG is committed to continued engagement with the 

members of this committee and regulators, as we work on developing solutions for the CLO marketplace. Chairman Garrett, Ranking Member Maloney, Congressman Barr, and members of this subcommittee, we appreciate your leadership on these issues. And if 

we do not find solutions that work for both regulators and the marketplace, then the companies that create jobs, and make capital investments to grow their businesses and provide goods and services 

will suffer. 

Thank you. 

[The prepared statement of Mr. Weidner can be found on page 

168 of the appendix.] 

Chairman GARRETT. Thank you. Again, I thank the panel. At 

this point, I recognize myself for 5 minutes. 

So let’s start with some of the basics, I guess. Mr. Weidner, you 

were just wrapping up, so I will just throw it right back to you. You 

heard the assertion in testimony—CLOs and CDOs, are they essentially the same thing that we are talking about here? 

Mr. WEIDNER. No. 

17 

Chairman GARRETT. Okay. Gee, I don’t normally get just a short 

answer like that. I want to ask the Administration questions, so— 

Mr. WEIDNER. No, no, I appreciate it. I will elaborate. 

Chairman GARRETT. Great. 

Mr. WEIDNER. What we are talking about is two different types 

of products. I think the only similarity that they really bear is the 

fact that they have three acronyms in their names. I think if you 

look at the performance of CLOs and the structural features that 

have been embed—that are a part of how CLOs are structured, you 

look at the granularity of the borrowers who are—there would be 

100 to 200 borrowers who are typically part of the CLO. 

Chairman GARRETT. Right. 

Mr. WEIDNER. Across many different industries. What you have 

seen is the underlying asset class has been able to—has proven 

itself. There are a number of other structural features which has 

demonstrated, including through the downturn in the economy and 

through the recession that the actual product works. 

Chairman GARRETT. Okay. 

Mr. WEIDNER. As compared to ABS deals, which have had the 

comparison in terms of the performance results are significantly 

different. 

Chairman GARRETT. Right. So it is a difference in performance. 

My guess is that you are going to give me the panel answer on this. 

The difference is that the underlying assets are different, as well. 

So, where we saw the problem in the crisis was in what type of assets. And what type of assets are we dealing with here? 

Mr. WEIDNER. The types of assets that were put into CLOs are 

not the originate to distribute type assets. They are well-underwritten, they are granular in terms of those—there is a broader 

array and diversity. But it really goes down to the assets that have 

been included, and the structural features in the deal. That if the 

deal starts— 

Chairman GARRETT. We were talking about mortgage-backed assets and some of the other cases, were we not, during the crisis? 

Mr. WEIDNER. Yes, we were. 

Chairman GARRETT. Right. Okay. And someone—Mr. Vanderslice 

or Mr. Quaadman, do you want to throw—the question here is who 

are we actually dealing with in this situation? Are we dealing with 

big businesses being financed, or are we dealing with middle-sized 

businesses that are being financed? I would assume that big businesses wouldn’t necessarily need this, but who are actually—who 

are the customers, I guess—yes, that is the right word—Mr. 

Quaadman? 

Mr. QUAADMAN. Sure. In fact, the LSTA and the Chamber are 

working together on a letter with corporate treasurers on the risk 

retention rule. And I could tell you, in going through the companies 

that use this, it is thousands of companies. It is primarily midsized and small companies. 

Chairman GARRETT. But what—define that in size, somehow. 

Mr. QUAADMAN. You are looking at small-cap and mid-size companies. You are not going to look at a Fortune 500 company, you 

are not going to look at companies of those sizes. Because they 

have many different ways to access capital. So, this is going to be 

much smaller businesses. 

18 

Chairman GARRETT. Okay, great. 

Ms. Coffey, one of the things I was confused about—but I guess 

everybody is confused about this—is the two rules that are out 

there. Dodd-Frank has the 5 percent risk retention requirement, 

right, on the one hand? And then you have the Volcker Rule that 

prohibits a bank holding more than 3 percent equity in a covered 

fund, right? So, that is the current law. How does the industry deal 

with that, first of all? 

Ms. COFFEY. I do believe there is language that suggests that for 

securitizations, there should not be a conflict between the risk retention rules and the Volcker Rule, other specific language that 

those—that one is exempt from the other. But I think if you combine the two—the concern with respect to the Volcker Rule and 

risk retention— 

Chairman GARRETT. Well, no. Let me step back. You are saying 

the intent was that there should not be a conflict, but there is a 

conflict. 

Ms. COFFEY. Correct, although I— 

Chairman GARRETT. Mr. Weidner, do you want to jump in? 

Mr. WEIDNER. Just to the extent that you are required to withhold, retain something greater for risk retention, it overrides the 

3 percent. 

Chairman GARRETT. Okay. 

Ms. COFFEY. So to that end, there is not a conflict within the 

Rule. But, obviously, there are extreme conflicts as far as what the 

Volcker Rule would do for CLOs, existing CLOs. And risk retention, obviously, would dramatically reduce new CLO formation by 

60 to 90 percent. So, they are very problematic. 

Chairman GARRETT. Right. In my last 13 seconds, and with that 

reduction in the size, then, the cost to the market would be—I 

think we heard some numbers on that. 

Ms. COFFEY. Yes. We have done research which indicates that if 

the CLO market was reduced by 60 to 90 percent, borrowers would 

end up paying $2.5 billion to 3.8 billion in additional interest payments per year simply because CLOs went away. 

Chairman GARRETT. I understand. Thank you. 

The gentlelady from New York? 

Mrs. MALONEY. Thank you. And I would like to ask Meredith 

Coffey and others to comment if they so wish. Ms. Coffey, I understand that many in the CLO industry think that the new risk retention proposal won’t work for the CLO market because CLO 

managers don’t have the balance sheet to retain the 5 percent of 

each deal. I think that is a valid concern. But didn’t the regulators 

take that into account when they proposed a separate loan arranger option for CLOs which would allow CLO managers to comply with the risk retention rule without keeping 5 percent of each 

deal on their own balance sheet? And can you explain why you 

don’t think the loan arranger option will work? 

Ms. COFFEY. Great. Thank you, Congresswoman Maloney. One of 

the issues around the arranger option on risk retention is that it 

would say that a bank originator would have to retain—hold and 

retain 5 percent of what they call a ‘‘CLO-eligible term loan bank.’’ 

When that was reproposed in the rules in August, we went and enVerDate Nov 24 2008 12:35 Aug 26, 2014 Jkt 088528 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\88528.TXT TERRI
19 

gaged with our bank members and asked them if this was feasible 

or if there was some form that was feasible. 

And ultimately, that became problematic, because the same 

banking regulators on the supervisory side did not want banks to 

agree to commit and retain, and never hedge, and never sell a position in a loan because the banking supervisors themselves say that 

they want banks to maintain the flexibility to work out of bad situations. So on one side you have the regulatory side of the body saying you must hold and retain 5 percent, and on the other side you 

have the supervisor saying we cannot have you agree to never, ever 

hedge or never, ever sell. 

So you had a conflict there. When we were talking to banks and 

they told us about this conflict, we understood that ultimately that 

option was not feasible because they would ultimately not be permitted to do that. Again, with never hedging and never selling. 

Mrs. MALONEY. I would like to ask anyone on the panel to comment, and yourself if you so wish. Are there alternative options 

that would work for CLOs while also complying with the spirit of 

the risk retention rule? 

Ms. COFFEY. Yes. Actually, one of the things that I would like to 

hit on is what we call a ‘‘qualified CLO concept.’’ And the idea behind a qualified CLO is having a CLO that is a high-quality CLO 

which meets a number of the agencies’ objectives. So it would support strong underwriting, that is a big objective. It would facilitate 

the continuity of credit. It would ensure the alignment of interests 

with the managers and investors. And it would limit the disruption 

in the market and protect investors. 

How would this qualified CLO do this? For a CLO to become a 

qualified CLO, its governing documents would have to require six 

major restriction categories. First of all, restrictions around asset 

qualities. The CLO must invest in higher-quality non-investment 

grade loans. Second, restrictions around the portfolio composition. 

It would have to be a highly diversified portfolio. Third, structural 

protections in the CLO, including mandating a minimum amount 

of equity in the CLO to protect the debt holders. 

Fourth, alignment of interest between the CLO manager and its 

investor in a number of different forms. Fifth, transparency and 

disclosure, ensuring investors have just a wealth of information 

about the CLO itself and every single asset in the CLO. And sixth, 

regulatory oversight, basically requiring the CLO manager to be a 

registered investment advisor, being regulated by the SEC, and 

being subject to fiduciary responsibilities to its investors. 

If we marry all of those together, I think ultimately what we 

have is a very high quality CLO that meets all the objectives of the 

agencies. 

Mrs. MALONEY. Okay, thank you. 

Professor Levitin, I would like to ask you about Mr. Barr’s bill 

to deal with the CLO issue. While I support a narrow, targeted solution for CLOs as outlined in the letter that I wrote, I am also 

concerned about creating loopholes in the Volcker Rule. So in your 

opinion, could this draft bill create loopholes for banks to go around 

the Volcker Rule? And if so, is there a way to fix the language of 

the bill? 

20 

Mr. LEVITIN. Congresswoman Maloney, let me start by saying I 

have not actually seen the language of Mr. Barr’s bill. I have seen 

some descriptions of it, and I would have concerns about whether 

it is overly broad and whether it might, in fact, create some loopholes for Volcker Rule evasion. What is not clear to me is the—let’s 

put risk retention aside. For the Volcker Rule, there clearly is some 

amount of legacy issue that we may need to address. 

Going forward, though, it is not at all clear why there needs to 

be any sort of intervention by Congress in order to address the 

CLO market for Volcker Rule purposes. The market is already 

starting to find solutions to make sure that CLOs do not—are either not covered funds, or that banks’ investments do not qualify 

as ownership interests. 

Mrs. MALONEY. My time has expired. 

Chairman GARRETT. Thank you. 

And now, to the vice chairman of the subcommittee, Mr. Hurt, 

for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. I just wanted to follow up 

on the chairman’s line of questioning relating to the difference between CLOs and CDOs. And I wanted to direct my question to Mr. 

Vanderslice and Mr. Weidner. Professor Levitin says in his testimony that for all intents and purposes, CLOs are indistinguishable 

from CDOs. And he says that there is no clear difference between 

a CLO and either a CDO or a hedge fund. 

That seemed to be the opposite of what Mr. Weidner was saying. 

So I was wondering if you, Mr. Vanderslice, and then Mr. Weidner, 

could discuss the difference between CLOs and CDOs in the context of the 2008 crisis. And the performance, and then how we as 

Congress look at this issue going forward to make sure that we are 

not—that we are taking the most prudent course. Mr. Vanderslice, 

if you don’t mind? 

Mr. VANDERSLICE. Yes, I am actually here just for CMBS. So I 

am going to defer to other witnesses. 

Mr. HURT. Okay. 

Mr. WEIDNER. Again, I think you need to look at the transaction. 

There are a couple of things we have outlined in the written testimony that we have submitted, that the types of features that the 

way CLOs have been structured are ones that have demonstrated 

its resiliency through the downturn. And I think that the types of 

features that are in those deals—they include the fact that 90 percent of these deals include senior secured loans. It is diversified 

across borrowers, diversified across industries. 

The deals are actively managed by regulated investment advisors 

who have—or there is a regulatory overview of them. We have features where if the deal starts to underperform, it has the ability 

to delever itself. And there is an alignment of interest. The managers themselves receive the bulk of their compensation on this coordinated basis. And they are very much incented to manage in the 

portfolio in the way that one would hope. 

And when—I think the real striking evidence for us is to say, 

okay, if we go through all that, that all sounds very nice. But if 

you actually look at the statistics going from 1993 to 2012, including going down for the recession, the historical performance numbers prove out that they have shown the resilience, see, because of 

21 

the way they have been structured. And I would also like to think 

that part of the reason that they have been so resilient is, also, the 

underlying borrowers themselves, who are part of these pools. Did 

the deals get stressed? They did get stressed. 

Deals that were down—every deal that I can tranche that I can 

thing of that was downgraded became upgraded, was upgraded 

back to where it was, a particular tranche. So I think there really 

is a separate analysis of what features make this a good product. 

And there is proven track history. Then when you look at ABS, the 

comparison—and certainly I think there have been some that have 

been submitted—it is a much different product. There was much 

less diversification and there are other issues. 

Mr. HURT. All right, that is great. And then let me just—because 

my time is limited, unfortunately, I want to make this question to 

Mr. Quaadman. And I wanted to thank—first of all, thank the 

Chamber for its demonstrated push to try to require that the cost— 

that there be a cost-benefit analysis for the entire impact of DoddFrank, and not just looking at these impacts on an individual policy basis, but looking at them from a holistic standpoint. 

But if you could try to quantify for people back home who will 

be affected by, or could be affected by the implementation—and we 

predict will be affected by the improper implementation of Volcker 

as it relates to these securities. What is the real impact for, as I 

mentioned in my opening statement, the auto parts manufacturer 

that relies on this financing to be able to operate. And how do you 

quantify the increased costs that absolutely get—I believe get—will 

get passed on to the customer, consumer? 

Mr. QUAADMAN. Let me take that question in two separate ways. 

One is, in that letter from December 2011 with the server that we 

have put in with the regulators we found that with large borrowers, or large companies that were in the debt markets, their 

costs would increase by 25 to 50 basis points. Or with smaller borrowers, it would actually go up by 50 to 100 basis points. So when 

you take a look at the size of debt markets, you are talking in the 

tens of billions of dollars, potentially, when you put it all together. 

When you are looking at CLOs here, particularly as this dries 

up—because remember what happened in January, the markets 

were reacting that these products were going to go away. The reason why they have come back a little bit in February is because 

you are here talking about solutions, the regulators are saying 

something. So the markets are sort of looking—while they may not 

be going away. 

If they do go away, those small businesses and the businesses 

you are talking about, you are going to have to go to a more risky 

form of financing if you can even find it. 

Mr. HURT. Okay. 

Mr. QUAADMAN. So that is going to make our system that much 

less stable. 

Mr. HURT. And jack up the costs. 

Mr. QUAADMAN. And jack up the costs. 

Chairman GARRETT. Thank you. The gentleman yields back. The 

gentleman’s time has expired. 

The gentleman from Massachusetts for 5 minutes. 

22 

Mr. LYNCH. Thank you, Mr. Chairman. I think that the arguments that you are making for changes in the risk retention rule 

are much more valid than an exemption from the Volcker Rule. So 

let me talk about risk retention and what we are requiring. I understand the structure is much different, and that Ms. Coffey, you 

have talked about this QCLO. Do you anticipate—I haven’t drilled 

down on the documents, but do you anticipate that these are corporate loan only? 

Because I think, generically, CLOs could also include bonds or 

derivatives. And to that extent, Mr. Levitin is right. They present 

some of the same risks that we are trying to get at for CDOs. So 

they are similar in that respect. So are you anticipating that this 

QCLO would be limited just to corporate loans? 

Ms. COFFEY. Certainly. Thank you for the question. In our proposal, we recommended that in the asset quality bucket that in the 

QCLO that 90 percent of the assets would be senior secured loans 

to U.S. companies that are subject to annual audits and that whole 

thing. We were saying that perhaps up to 10 percent could be 

things like corporate bonds to those same companies. But I think 

that is a point of discussion. 

But we ultimately see this as being a vehicle that is specifically 

focused on providing financing to U.S. companies. 

Mr. LYNCH. What about the equity tranche where the risk is? 

How do you adjust that in the QCLO? 

Ms. COFFEY. Certainly. One of the things that we said in the 

QCLO is that we should have structural protections that are mandated in a qualified CLO. And that the equity component of the 

qualified CLO should be at least 8 percent of the assets. 

Mr. LYNCH. Okay. And what would you—so what would be the 

protection for the equity tranche? Are you saying 5 percent of the 

8 percent? Is that— 

Ms. COFFEY. What we are saying is the risk retention component 

of the CLO manager. Now, remember, a CLO manager is a thinlycapitalized asset manager. 

Mr. LYNCH. Yes. 

Ms. COFFEY. And so what we are saying is in order to do a 

QCLO, in order to manage CLOs going forward like they have done 

for the last 20 years and have seen no losses whatsoever, a CLO 

manager would have to purchase and retain 5 percent of the equity 

of that CLO. 

Mr. LYNCH. Okay. 

Ms. COFFEY. So a CLO manager would have to bring—find, and 

bring $2.5 million simply to run its business going forward. 

Mr. LYNCH. All right. 

Mr. Levitin, what do you think? 

Mr. LEVITIN. I actually am somewhat sympathetic to the QCLO 

concept. 

Mr. LYNCH. Me, too. 

Mr. LEVITIN. The devil is in the details. But the concern with 

risk retention is that you are going to have a conflict of interest— 

without it, there is going to be a conflict of interest between whoever is putting together the securitization, whether it is CLOs or 

mortgages or what have you, and the investors. And as Ms. Coffey 

has outlined the QCLO concept, it seems to be—if all the things 

23 

she laid out are actually done right, that probably addresses a lot 

of those concerns. 

Mr. LYNCH. Yes. Okay. I guess I am going to reserve my right 

to object at some point. It sounds like you are on the right path. 

And I agree that structurally it presents a different set of problems 

than what we originally focused on. And it is sort of like the trust 

preferred security solution that we came up with recently. But I 

think it is, in Mr. Levitin’s words, the devil is in the details here 

on how we get this done. But I think there could be a way forward. 

I just hope that the Democrats and Republicans can work together here. I think, just a flat-out exemption, as in the language 

of the draft bill, is a non-starter. I don’t think it is necessary, and 

I think that would get in the way of us coming to a general agreement here that I think would serve the industry and investors and 

taxpayers, as well. 

I will yield back, thank you. 

Chairman GARRETT. The gentleman yields back. 

Mr. Stivers is recognized for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate the witnesses being here today, and I appreciate their testimony. So under 

the Volcker Rule, when you combine, I guess, the Volcker Rule, the 

qualified mortgage rule, the QRM rules, the risk retention rules, 

the proposed rules of Basel III and other capital requirements, 

what—I guess I will direct this question to Mr. Quaadman. What 

cumulative impact do you think all that will have on the ABS market? 

Mr. QUAADMAN. I think overall it is going to have a negative impact. If you take a look at the way that business is financed, when 

you take a look at Basel III it is going to impact their commercial 

lines of credit. It even impacts their ability just to park cash in 

banks. When you take a look at risk retention, and with the 

Volcker Rule, in particular with CLOs, as we have talked about, 

that is going to be impacted, as well. 

What we don’t know yet with the Volcker Rule is how the 

Volcker Rule is going to start to impact other debt and equity instruments that corporate treasurers use and how they are underwritten. 

Mr. STIVERS. I think Mr. Hurt asked some questions that you answered about what that will do to the cost of borrowing. And you 

brought up the ABS, or the CLO problem. And given that the last 

questioner talked about bipartisanship, I think on the CLO issue, 

there has been some bipartisanship. And I want to remind the committee of the remarks of the ranking member, Ms. Waters, on January 15th, when she said that, ‘‘I think that we are able to work 

with the regulators on some of the issues being identified, such as 

the CLO issue.’’ 

And I think there is a real acknowledgment that in the Volcker 

Rule, there is a problem with the CLO. I guess this question is for 

Ms. Coffey. What do you think the easiest way to fix the CLO rule 

would be? 

Ms. COFFEY. With respect to the Volcker Rule? 

Mr. STIVERS. Yes. 

Ms. COFFEY. We are very heartened by the work that Mr. Barr 

has done on this with the prospective legislation. We think it goes 

24 

a long way to addressing the issues both in dealing with the legacy 

issues of CLOs that were purchased over many years. We think 

that will be very helpful. And we also think the language that he 

proposed for clarifying what an ownership interest would be will be 

very helpful going forward. 

One of the things, however, that has emerged since Mr. Barr has 

been working on his legislation is that we have heard from the regulatory agencies that they might expand their definition of what an 

ownership interest is, to like subsection D, subsection E, which 

talks about conflating, perhaps, interest payments with excess 

spread. And to the extent that continues to be a problem, we might 

want to provide additional support on that bill. 

Mr. STIVERS. So what Ms. Coffey said, and I think it makes 

sense, is that Mr. Barr’s approach is a good starting point for fixing 

the CLO problem. And I think while there have been some potential new issues brought up or are being discussed by the regulators 

that could require some additional changes, I think his approach 

is certainly a good start. And I want to applaud him for all the 

work that he has done on this issue, and thank him on behalf of 

manufacturers in my district that use asset-backed securities and 

on behalf of folks who have been purchasers of CLOs in the past. 

I think all the work he is doing will make a big difference for the 

future of the whole ABS market. 

I guess my other question is on coordination. And we will just 

kind of ask the panel, since I have a minute and 15 seconds left. 

Do you agree with the statement that the regulators have coordinated all the regulations that I talked about well so that they 

interact well? If the answer is yes, raise your hand. I would like 

to note that no one raised their hand, and that I do believe there 

are real problems with the interactions of many of these rules and 

they haven’t looked at the cumulative impact in how they interact 

with each other. 

And while it was stated earlier that the risk retention rules may 

supersede some of the requirements on what the limits under the 

Volcker Rule are, it is still unclear what the interactions of many 

of these rules are doing together. And I think it is really important 

that the regulators sit down and try to coordinate these rules. Because as they come out drip, drip, drip one by one there is no real 

coordination on this and not enough coordination that makes them 

work well together. 

Does anybody disagree with that statement? I would like to note 

for the record that everyone agreed with that statement. 

Mr. WEIDNER. We agree. And I think what we see—what we are 

heartened to see is that there is now an effort to try to coordinate. 

And I think that is going to be very helpful, as we try to address 

these issues across multiple agencies and try to come to consensus. 

And— 

Mr. STIVERS. It is a starting point. Thank you. 

Mr. WEIDNER. It is a starting point. And I think that we are appreciative of that, but to this point I think it was something that 

was needed. 

Mr. STIVERS. Thank you. I am out of time, so I will yield back. 

Thank you, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back. 

25 

Mr. Foster is now recognized. 

Mr. FOSTER. First off, I would like to compliment the chairman 

and the bipartisan members of the committee who have engaged on 

this issue. I think it has been very productive and a breath of fresh 

air. And seeing the committee and the regulators coming in and 

trying to deal with, in particular, the legacy issues, which I think 

are really more an unintended consequence of this. 

But I was more interested—my one question has to do with going 

forward. Ms. Coffey, you had mentioned the interest cost savings 

from borrowers, basically having to do with the existence of the 

CLO market. And the CLO market, by most accounts, has significantly healed itself by finding Volcker compliance ways of doing 

business. And so, it is at least partially recovered. 

I was wondering what fraction of the lowered cost of interest 

rates really have been recaptured by that healing and the 

workarounds for the Volcker Rule versus what fraction—because of 

compromises in the structure that the market might have found all 

by itself without the Volcker Rule presumably has some increased 

interest rate cost. What fraction of the potential savings from CLO 

have been recaptured by the market healing itself? 

Ms. COFFEY. I think that is an excellent question. The Volcker 

Rule is an immediate dislocation in the market that we are dealing 

with today. So, we are observing that right now. And any healing 

that we have seen with respect to Volcker has come from the comfort market participants are taking in the fact that lawmakers are 

taking this issue very seriously and working together to resolve it. 

So, we are hoping we can heal that. 

The numbers I quoted before, the fact that you could see if CLOs 

go away, that it would cost U.S. companies $2.5 to $3.8 billion of 

annual interest. That excludes concerns around Volcker and was 

focused significantly on risk retention. If risk retention went forward the way it is currently written, it is estimated it would reduce 

CLO market by 60 to 90 percent. And that in and of itself, excluding Volcker, would cost U.S. companies $2.5 to $3.8 billion. 

Mr. FOSTER. Okay. Is there now, or will there be—would it be 

possible in the future to quantify the impact of the restructures to 

work around Volcker that have taken place in the marketplace? To 

eyeball roughly what the economic damage was or was not? 

Ms. COFFEY. I think once we come through and resolve this, 

which I do hope that we can do with your help, then I think we 

can look back and say, here is the damage that we avoided because 

we did resolve it. It may be a little too early to assess that now. 

Mr. FOSTER. Okay. Well, thank you. That was my one question. 

I yield back. 

Chairman GARRETT. Mr. Barr? 

Mr. BARR. Thank you, Mr. Chairman. I appreciate the testimony 

of the panel. And Ms. Coffey, a question to you. You testified that 

it has been estimated that if Volcker is not changed, demand 

among banks for CLO notes could drop by 80 percent, significantly 

reducing CLO formation and reducing credit availability. If these 

borrowing—if borrowing costs do increase because of lack of credit 

availability, what will that mean to these businesses that rely on 

CLO financing? 

26 

Ms. COFFEY. Right. I think that is a very good question and very 

important going forward. I think one of the things that is important to understand is just how broad the Volcker problem is. Some 

people say it is hard to quantify exactly how much of a problem 

Volcker is. But in fact, that information is available and it is available publicly. Reuters published a publication and a chart that observed that 62 percent of U.S. CLOs have bonds in them, usually 

less than 3 percent, but do have bonds in them. 

And all CLOs have bond buckets so they are able to invest in 

bonds. And hence, they would end up being covered funds. Moreover, these CLOs will not go away any time soon. There are about 

$300 billion of CLOs outstanding today. In July 2015, it is estimated there will still be $240 billion of CLOs outstanding. So, this 

is a big problem. This goes to the issue that you asked of what will 

this do to borrowers. If you have a situation where the Volcker 

Rule basically impedes U.S. banks and some foreign banks from investing in CLOs, you could see their appetite reduced by about 80 

percent. They just will not participate in the CLO market. 

And ultimately, that leads to our other point, in that we could 

see a significant cost of financing for U.S. companies. What happens when you have a significant cost of financing, or a decreased 

credit availability for companies? That means these companies 

which have over 5 million employees can’t build new factories, and 

can’t build new cellular networks; they can’t expand. They can’t 

combine and merge to build bigger companies that can compete effectively globally. 

It ultimately would have a very destructive effect on U.S. companies. 

Mr. BARR. With all respect to Professor Levitin, when he talks 

about systemic stability and the need to fulfill the Dodd-Frank’s 

mandate for systemic stability, what does this actually do in practice in terms of the stability of the financial markets? 

Ms. COFFEY. I think it certainly reduces financing for U.S. companies. And I think financing for U.S. companies is very important 

for the economic situation in the United States. 

Mr. BARR. Professor, in all fairness, I will give you an opportunity to respond. 

Mr. LEVITIN. I greatly appreciate that. I think there is a really 

important assumption underlying Ms. Coffey’s analysis. And that is 

that to the extent that banks are not able to invest in CLOs, the 

pool of money that would be invested there just disappears from 

the economy. It doesn’t. Banks may reduce their lending, but they 

can also put that money into other forms of asset classes. And it 

is actually a very complicated analysis that I don’t think anyone 

has done to figure out really what the ultimate cost effect is going 

to be on cost to financing. 

It may go up. 

Mr. BARR. But we do—in January, we had a cratering of the 

CLO market. So we do know that without any kind of congressional intervention, we saw what it was going to do. Let me—because my time is running out. 

Mr. LEVITIN. We saw that for 1 month, but we have this month 

also. I would just add to this that CLOs are one way that companies can finance themselves. There are other ways. It is not as if 

27 

companies are not going to have financing routes. This isn’t as if 

no one could get a mortgage. This is just one particular financing 

channel. 

Mr. BARR. Professor, thanks for your testimony. Since my time 

is running out, I do want to get at kind of the crux of the matter 

here. In your testimony, you argued that structured financial products fueled the housing bubble and produced the financial crisis. 

I would be interested to hear from the other members on whether or not there was any reason why either the Volcker Rule or the 

risk retention rules should not apply to CLOs in a way that they 

would apply to mortgage-backed securities. In other words, is there 

a reason why CLOs are different? 

Mr. WEIDNER. If I could take the—I think we have consistently 

said, our membership, is that CLOs are not the type of originateto-distribute type of securitization that is cause for concern, and 

has been really the impetus behind risk retention in terms of aligning interests in a way that ensures that the underlying assets are 

well-underwritten. What we have seen, and it is just very—we 

have seen the structural feature of these deals, the quality of the 

assets and how they have been actively managed, the rigorous reviews that they have. 

There are a number—those types of things have led to the performance of those assets through very difficult times. So from our 

point of view, there is an alignment of interest. There hasn’t 

been—who is to say who the sponsor of these are? The assets are 

acquired in from the market. So from our point of view, there isn’t 

a driver here to say that risk retention is needed because we need 

someone to hold for the duration of the deal to make sure that the 

pool is being properly—is put together. 

But one thing to appreciate about all this—and when you think 

about different type of ABS—CLOs are the only asset type that are 

actively managed. Pool assets are coming and going out, you could 

turn a portfolio over to 35 to 40 percent. So I think that what we 

are seeing is the structural feature and the criteria of what goes 

into underwriting an asset going in are the types of things that 

risk retention is getting at, which is to make sure that there are 

good underwriting standards of the assets that come in. 

And so we see a difference as opposed to these other ABS assets, 

which are static, and you are wanting to make sure—most of these 

are static, and making sure that somebody retains an interest who 

is actually securitizing these assets. This is not that product. 

Mr. BARR. Thank you. 

I yield back. 

Chairman GARRETT. Thank you. The gentleman yields back. And 

that completes our hearing for today. We have been called to votes. 

I once again want to thank each and every one of the witnesses, 

those who have been here before and new witnesses, as well. 

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. 

28 

And without objection, we are hereby adjourned. 

[Whereupon, at 4:03 p.m., the hearing was adjourned.] 

(29) 

A P P E N D I X 

February 26, 2014 

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