When Regulation Threatens, Bankers Predict Doom For Main Street

by Jesse Eisinger

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No sooner had that issue been resolved when Washington convulsed with a new crisis, now upon us: the C.L.O. panic...The House held a hearing last week to examine the issue. American Banker, a trade publication, ran an article with a headline that succinctly summarized the industry’s view: “How Dodd-Frank Might Kill the C.L.O. Market.”

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Collateralized loan obligations, as the acronym is known, are bundles of loans, usually made to junk-rated companies. They use the same techniques as collateralized debt obligations, which were often made up of subprime mortgage investments and were the rotten core of the financial crisis. C.L.O.’s caused billions in losses for banks during the market panic of 2008, but most recovered strongly and memories faded. Junk-rated companies rallied, and C.L.O.’s roared back.

Under the Volcker Rule, which prevents banks from making speculative investments or owning large pieces of hedge funds or private equity firms, some C.L.O. holdings might be prohibited. Some C.L.O.’s own securities or bonds, and those are considered more speculative. (In a regulatory quirk, bonds and loans get different regulatory treatments.) Some C.L.O.’s give certain investors the ability to remove the manager that makes the C.L.O.’s investment decisions. That could be construed as a form of ownership control, which would bar banks from participating under a strict construction of the Volcker Rule.

The banking industry has been making loud noises about how the uncertainty could have dire consequences. As with the TruPs ruckus, the big banks have defended their interests in the name of smaller and more sympathetic entities. According to the banking lobby and its friends in Congress, any threat to the C.L.O. market is actually a dagger pointed at midsize businesses, which will have trouble finding capital as a result. In written testimony to the House subcommittee, a United States Chamber of Commerce representative expressed “serious concerns that the regulators had failed to take into account the impact of the Volcker Rule upon the capital formation of Main Street businesses,” adding ominously that “it may only be the first wave of capital formation problems that may crop up as a result of the Volcker Rule.”...this skirmish is largely about preserving a market for the largest banks. Just three “too big to fail” banks — JPMorgan Chase, Citigroup and Wells Fargo — account for 71 percent of bank C.L.O. holdings, according to Better Markets, the banking reform group. And the large banks get fees from creating the deals.

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http://www.propublica.org/thetrade/item/when-regulation-threatens-bankers-predict-doom-for-main-street