All items from Credit Slips

Along with some thoughts about FSOC's designation of SIFIs in general, over at Dealb%k.

Posted 2 weeks 1 day ago

Prepaid CardLast week, the FDIC released its 2013 National Survey of Unbanked and Underbanked Households. Some of the Survey's results were similar to the FDIC's 2009 and 2011 surveys. 7.7% of households were unbanked. Another 20% of households were underbanked. I took note of the Survey because its maps of unbanked and underbanked rates by state have been receiving some attention online. But what I think is more intriguing are the Survey's questions about prepaid cards.

Posted 2 weeks 1 day ago

Sometimes you can beat the door down with efforts to get Federal and State officials to tackle problems, but at the end of the day, locals can best get the job done, quietly and quickly. A story in Monday’s New York Times bears this out.  For example, San Francisco City Treasure Jose Cisneros noticed that families who finally took advantage the of the earned income credit, the country’s largest public benefit program, often had no bank accounts in which to deposit their refunds. This meant losing a portion of this important public benefit to check cashers and others.

Posted 2 weeks 2 days ago

Courtesy of Jack Ayer, professor emeritus of law and polymathy, comes the following from the Wikipedia entry on Modigliani -- Amedeo, not Franco:
Modigliani was the fourth child, whose birth coincided with the disastrous financial collapse of his father's business interests. Amedeo's birth saved the family from ruin; according to an ancient law, creditors could not seize the bed of a pregnant woman or a mother with a newborn child. The bailiffs entered the family's home just as Eugenia went into labour; the family protected their most valuable assets by piling them on top of her.
It's on Wikipedia, so who is to dispute it?

Posted 2 weeks 6 days ago

This week's Dealb%k is about foreign debtors that file under the US Code, which also just happens to be the subject of a recent paper that my co-author and I have posted online.

Posted 3 weeks 19 hours ago

Almost two weeks ago now, the Delaware Supreme Court handed down its decision over J.P. Morgan's mistaken termination statement in the General Motors bankruptcy. (Note to Google Chrome users like me -- the link may not work; try a different web browser.)  I think they got it right, but to understand why, one obviously needs to know the facts. Melissa Jacoby has blogged about the case (especially) here and here. As Melissa explains in more detail in the former post, the case revolves a mistaken Uniform Commercial Code (UCC) filing by JPMorgan Chase. 
To really stylize the facts, there were two loans from JPMorgan Chase to General Motors. Let's call them Loan A and Loan B. Both loans were secured. Loan A was being paid off. Acting on behalf of JPMorgan Chase, lawyers for General Motors were instructed to file a termination statement in the UCC records. Because of a slip-up in the paperwork, termination statements were filed for both Loan A and Loan B. At the time General Motors entered bankruptcy, Loan B was still outstanding in the amount of $1.5 billion, meaning that if the termination statement is effective JPMorgan Chase would be unsecured in the General Motors bankruptcy.

Posted 3 weeks 1 day ago

Caterham MarussiaI am obsessively interested in two things -- bankruptcy and Formula One auto racing. I feed the first interest through this blog. The second interest is tended to by watching way, way too much Formula One on television. Indeed, the best way to wind me up is to ask me if Formula One is the same as Nascar.
This weekend, my worlds collided when two Formula 1 teams -- Caterham and Marussia (shown to the right) --were placed in administration in the U.K., a procedure akin to chapter 11. I was going to resist doing a post, but now that Pat Fitzgerald over at Bankruptcy Beat has posted a story, I feel enabled.

On the business side, a lot has been written about how the cost model of Formula 1 is unsustainable. It probably is. A low-end budget just to go racing in Formula 1 probably pushes $100 million with top end teams like Mercedes, Ferrari, and Red Bull spending $300 - $500 million. Everything is private such that no one outside knows the finances for sure.

Posted 3 weeks 4 days ago

There are three major new regulations shaping the housing finance market:  QM (qualified mortgage), QRM (qualified residential mortgage) and Reg X.  QM is a safe harbor from the statutory ability-to-repay requirement that applies to all mortgages.  QRM is a safe harbor from the statutory risk retention requirement that applies to mortgage securitization.  And Reg X are the new mortgage servicing regulations.  It's important to understand how these three regulations interact and how they're going to affect the housing finance market.  (There's also new TILA/RESPA disclosure stuff, but I don't think that's particularly impactful, in part because I don't think disclosure regulation is especially effective in most real world circumstances.) 

Posted 4 weeks 19 hours ago

The long awaited credit risk retention rules for securitization are out. The big question--whether the qualified residential mortgage or QRM exemption would be narrower than the CFPB's qualified mortgage or QM safe harbor to the Ability to Repay requirement for mortgages is no. QRM=QM. The short version is that the rule doesn't require meaningful credit risk retention where it counts, and imposes significant market-shaping safe-harbor requirements where skin in the game isn't so important.

The basic rule is that 5% credit risk must be retained, unhedged, by the securitization sponsor, either as a pro rata vertical slice of the deal or as a horizontal slice equal to 5% of the fair market value of the deal as of the closing date. But there are lots of exceptions: CMBS B-pieces suffice, Ginnie Maes, Fannie/Freddie (as long as they have "capital support form the United States" (they can still qualify with the QRM exception and other exceptions for multi-family even without US capital support), etc. Commercial loans, commercial mortgages, and auto loans all have their own QRM-type safe harbors.

In fact, as far as I can tell from a quick perusal of the rule, there is only a meaningful credit risk retention requirement without exemptions for (1) credit card securitization, (2) non-pass-through CDOs, and (3) auto and equipment leases and less common sorts of securitizations. Everything else has either a blanket safe harbor or a safe harbor provided that the underlying assets meet certain requirements.

Posted 4 weeks 2 days ago

Yves Smith has had some great coverage of the AIG bailout trail over on Naked Capitalism.  While the litigation, as Yves has characterized it, is a bit like a brawl between the ugly stepsisters, it's telling us all kinds of stuff we didn't know (or at least couldn't document) about the 2008-09 bailouts.   
Today's coverage is a must-read piece by Matt Stoller about the civil service regulatory capture at the Fed, as personified by its general counsel.  The AIG trial has highlighted some of the worldview problems at the Fed. It has also included some jaw-dropping exchanges like the following:
Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?
A: I don’t know.
You can't make this stuff up.  I'll let readers draw their own conclusions. 

Posted 4 weeks 2 days ago