10/01/2010

Puzzled Market Debates Safe-Harbor Ruling

Securitization specialists still aren't sure what to make of one major aspect of the FDIC's Sept. 27 "safe harbor" ruling.

An apparent grandfather clause in the long-awaited directive seems to prevent the FDIC from seizing securitized assets - primarily credit-card accounts - from existing securitization vehicles in the event of an issuing bank's bankruptcy. And the protection would extend to paper sold through those entities in the future. However, some don't read it that way.

At issue is one of the key facets in an ongoing debate over planned revisions to the FDIC's safe-harbor rules, which spell out whether securitization pools are ringfenced from banks' other debts. Morrison & Foerster attorney Jerry Marlatt said the FDIC's language can be interpreted to support the grandfather-clause theory. However, he added that the wording also can be understood to mean banks must abandon the vehicles used for their outstanding securitizations and set up new trusts if they want continuing safe-harbor protection - the stance industry players initially thought the FDIC would take.

Should existing securitization vehicles be grandfathered, it would come as welcome news to banks that use such entities to fund their lending businesses. The FDIC, meanwhile, hasn't confirmed if that actually is the case.

Mayer Brown's Jason Kravitt is among a growing group who see no ambiguity in the rules, maintaining that the FDIC has created an out for existing securitization vehicles. So is Deutsche Bank researcher Katie Reeves, who wrote in a Sept. 29 report that conversations with market players support her view. The American Securitization Forum is leaning toward the same conclusion.

For the most part, the FDIC's ruling is the same as a preliminary version it released in May. To qualify for safe-harbor protections, banks must retain 5% of each tranche of asset-backed bonds they issue while adhering to new disclosure requirements that would match proposed changes to the SEC's Regulation AB and directives in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

At least among credit-card deals, most banks already keep exposures of at least 5% via so-called sellers' interests. What's causing trouble is a condition under which securitized assets would be insulated from FDIC seizure only if they can achieve a true-sale accounting designation. That's something that has become difficult if not impossible since the Financial Accounting Standards Board's FAS 166 and 167 rules took effect Jan. 1. However, Kravitt and Reeves believe vehicles that followed true-sale practices under FAS 140, the predecessor to FAS 166 and 167, would continue to receive safe-harbor protection under the Sept. 27 ruling - hence, the focus on whether older trusts are grandfathered.

The new safe-harbor rules kick in Jan. 1. In a Sept. 27 statement, ASF executive director Tom Deutsch warned about the ruling's impact on bank-sponsored securitizations in general: "The FDIC's action today will seriously harm a bank's ability to sponsor a new securitization."

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