[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
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
U.S. GOVERNMENT PRINTING OFFICE
88-528 WASHINGTON : 2014
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama BRAD SHERMAN, California
PETER T. KING, New York RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
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
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
Dodd-Frank 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 Dodd-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 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
Dodd-Frank'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. Dodd-Frank 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 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-to-fail 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 2\1/2\ 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 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 asset-backed 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 hard-pressed 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 backwards. 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
2\1/2\ 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 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 asset-backed 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.
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.
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.
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 Dodd-Frank 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 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 need to be looked at holistically to see
how they work in conjunction 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 Dodd-Frank, 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 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 flexibility 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 b-piece 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.
[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
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.
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 mid-sized 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.
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 engaged 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?
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 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 Dodd-Frank, 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.
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
thinly-capitalized 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 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 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.
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?
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 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 originate-to-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.
And without objection, we are hereby adjourned.
[Whereupon, at 4:03 p.m., the hearing was adjourned.]
A P P E N D I X
February 26, 2014
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