A common view across ABS sectors in the US is that Trump’s vow to do away with the Dodd-Frank Wall Street Reform and Consumer Protection Act amount to little more than appeasement of pro-business constituents and that Wall Street reform is going to take a back seat to bigger issues that energised Trump’s voter base.
“There are so many other fish to fry right now,” said one structured finance buy-side analyst. “As president, there are only three to five priorities that can be at the top of the agenda. Dodd-Frank is the law of the land and was set up purposefully to be hard to undo. It can be improved but it won’t be repealed.”
Retension tension
For structured finance markets, the biggest issue is the coming risk retention rule, which comes into effect on December 24. Issuers in CMBS and CLOs have been sprinting to push deals out the door that comply with the rule before its implementation date in order to engage in price discovery for compliant deals.
The head of an industry lobby speaking with GlobalCapital said that while a Republican controlled executive and legislature was “reasonably positive” for ABS markets, the process of rolling back regulation written six years ago was not a matter of simply hitting the reset button.
“I don’t know where a new administration really gets us,” he said. “Do we rewind everything? I’m sure some issuers would be for that, but some investors might have some anxiety.”
He added that institutions invested significant capital in putting compliance infrastructure in place, and that there would almost certainly be a cost associated with undoing it all.
An alternative to Dodd-Frank proposed by House Financial Services Committee chairman Jeb Hensarling, a Republican, is being floated as a template for watering down the regulation. Under his Financial CHOICE Act, all ABS sectors except for RMBS would be exempt from risk retention. But again, sources said it was unclear what the timing or scope of reform would be.
“Hensarling laid out his agenda in the CHOICE Act,” said one Washington DC-based lawyer, “but it’s a broad agenda. Some of it is about dismantling Dodd-Frank, some isn’t. But I think some people will start to look there.”
The buy-side analyst and the lobbying chief both said an easy fix would be to lessen capital requirements for ABS under Dodd-Frank or to reduce the liquidity coverage ratio under Basel III. This would leave two important components of post-crisis regulation — transparency and confidence building — unchanged.
“Investors care about disclosure and skin in the game,” said the lobbyist. “They don’t necessarily care about liquidity ratios for banks, but all of the issuers complain that it is too punitive. We wonder if the way forward is for the new administration not to repeal the rules but to give benefits to holding ABS.”
Drop dead Freddie
Outside of Dodd-Frank and risk retention, housing finance players are hoping for an end to the conservatorship of the government sponsored enterprises (GSEs) to be on the table in the near term. The market is hoping for the long awaited “recap and release”, the end of the Treasury sweep of Fannie Mae and Freddie Mac’s profits and the release of the housing finance giants from conservatorship.
“With Republicans in control, the possibility of something actually moving forward is much higher,” said the head lobbyist.
In terms of the direct impact on ABS primary and secondary activity, Trump’s win was a blip on the radar for structured finance. Spreads on consumer ABS, CMBS and CLOs were either unchanged or slightly tighter through Thursday afternoon, with sources saying that there was no knee jerk reaction to the outcome the way the UK referendum on EU membership had sparked a broad selloff in fixed income and equities in June.
An ABS investment adviser said the securitization markets were much less vulnerable to political shocks than to macroeconomic influences. He advised market participants to position for an interest rate increase, rather than try to predict what the world would look like under a Trump presidency.
A rate rise was described as a “slam dunk” by a Texas-based investor on Thursday, despite Trump’s feuding with US Federal Reserve chair Janet Yellen during the campaign. Even though the market’s projection of a rate rise at the December meeting of the Federal Open Market Committee has gone from around 85% to 50% after the election, most ABS market participants believe it is still likely to happen. Trump, sources said, will realise that a dovish Fed will be a boost to some of his economic objectives, and that easy money might be needed to finance some of what he promised voters.
“It would be a big shock if they didn’t raise rates in December,” the investor said. “For ABS, the market is driven by the economy. It is directly correlated with credit performance, and the big question is what Trump will do to the domestic economy and whether he’ll drive growth or cause recession.”