Thursday, October 29, 2009

A Good idea

The House has released its proposal for financial regulatory reform. While some of it is dicey, including the Resolution Fund (it charges fees to the surviving firms to pay for the failed firm) and also the wind down provision specifically excludes secured bond holders. All in all it is rather vague, which given the history means the regulators will have the tools but not the will to enforce the law.

This particular section though, was pretty spot on in regards to securitization.
Credit Risk Retention I have thought all along that the originate-to-distribute model was flawed because it favored applying teaser rates to allow the borrower to make the minimum amount of payments necessary to then sell their loan asset into the securitized pool. It will be interesting to see, again the wording is vague, how this portion gets hammered out. It's one thing if the pools, is just that a pool which pays out regular cash flows. However, if the pool is tranched so that i-bank can create super senior tranches all the way down to the equity tranche, then what portion will the originator have to keep. Would it be just the equity portion which suffers first loss or will it be a portion of each tranche? (If you have no idea what I am talking about with tranching please click here for a primer.)


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