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Financial Services Update – September 23, 2011

House Passes Government Funding Bill, Shutdown Looms Again

The fiscal year Continuing Resolution (CR) that funds the government in lieu of Appropriations bills expires on September 30th. Therefore, Congress is required to pass another funding resolution by October 1st in order to prevent a government shutdown. The House passed its CR late Thursday night after cutting an additional $100M from the Department of Energy program that backed the Solyndra loan. The House bill contains $3.65B in disaster relief, which is partially offset by a $1.5B cut to a Department of Energy loan program for manufacturers of fuel-efficient cars. On Friday, the Senate voted to reject the House’s bill by a vote of 59 to 36 because Senate Democrat leaders are seeking greater disaster relief funding. The most likely outcome is for the House and Senate to pass a “clean” CR that funds the government until November 18 and postpones the debate over increasing disaster funding. While Congress is scheduled to be in recess next week, the House and Senate must reach an agreement on a funding resolution before recessing.

Former SEC General Counsel Testifies About Madoff Ties

On Thursday, David Becker, the former general counsel of the Securities and Exchange Commission (SEC), testified before two Congressional panels regarding a report released this week by the SEC’s inspector general that referred Becker’s actions to the Justice Department for an investigation of possible violations of conflict-of-interest laws. Prior to Becker’s appearance before the committees, SEC Chairman Mary Schapiro and SEC Inspector General David Kotz also testified about their knowledge of the Becker matter. While Becker testified that he told numerous SEC officials about his financial connection to Madoff accounts, Schapiro told the Committee that she did not inform the other four SEC commissioners because Becker was cleared by the SEC’s ethics office. It is unclear if the Justice Department’s investigation will lead to any charges against Becker, but the SEC is already adopting several changes based on the inspector general’s report, including redirecting the top ethics officer to report directly to the chairman of the commission, rather than the general counsel.

House Subcommittee Passes First Postal Reform Bill

On Wednesday, the House Government Reform Oversight Subcommittee passed legislation to overhaul the U.S. Postal Service (USPS). The bill, sponsored by Rep. Darrell Issa, R-Calif., Chairman of the House Oversight and Government Reform Committee, would allow USPS to drop a delivery day and adjust labor costs. However, Rep. Dennis Ross, R-Fla., who chairs the House Oversight Subcommittee responsible for postal issues, introduced and passed a substitute amendment to the bill that also would cut back door-to-door delivery and reduce the postal workforce starting with retirement-eligible employees before laying off other staff. The bill now heads to the full Committee for consideration.

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Improvements to the Asset-Backed Securitization Process Under the Dodd-Frank Wall Street Reform Bill

The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act includes significant changes to creation and regulation of asset-backed securities (“ABS”) (see Title IX, Subtitle D). The three most significant areas in the bill deal with (1) risk-retention requirements, (2) disclosure and reporting requirements, and (3) representations and warranties in ABS offerings.

Risk-Retention Requirements

Under the bill, the Federal banking agencies must publish rules to require securitizers of ABS to retain an economic interest in at least 5% of the credit risk for any asset that the securitizer conveys to the a third party. This requirement is intended to keep a securitizer’s “skin in the game,” so that the securitizer has a disincentive to take unnecessary risks. There may be exceptions or exemptions, prescribed by rule or regulation, to this risk-retention requirement for securitizations (i) of “qualified residential mortgages,” when the securitizer certifies to the SEC as to the effectiveness of the securitizer’s internal controls for ensuring that all of the assets are actually qualified residential mortgages, (ii) that are in the public interest and for the protection of investors, (iii) of assets issued or guaranteed by the United States or an agency of the United States (other than Fannie Mae or Freddie Mac), (iv) of assets issued or guaranteed by any state (or political subdivision), which are also exempt from the registration requirements under the Securities Act, and (v) of other assets, including any loan or other financial asset made, insured, guaranteed, or purchased by an institution that is supervised by the Farm Credit Administration.

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Treasury and the Federal Reserve Announce the Term Asset-Backed Securities Loan Facility

On November 25, 2008, Treasury and the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (“TALF”).  The intent of TALF is to assist the credit markets in meeting the needs of consumers and small businesses by facilitating the issuance of, and improving the market for, asset-backed securities (“ABS”).  To fulfill this intent, the Federal Reserve Bank of New York (“FRBNY”) will provide up to $200 billion for non-recourse loans that are fully secured by eligible ABS.  Treasury will use funds from TARP to provide $20 billion in credit protection to the FRBNY.

Collateral eligible for a TALF loan includes dollar-denominated, ABS that not only must receive the highest possible long-term investment rating from at least two nationally recognized ratings agencies but also cannot be rated by any rating agency below the highest possible long-term rating.  Newly or recently originated auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration must comprise all or substantially all of the credit exposure underlying the ABS. The underlying credit exposure cannot include exposures that are themselves cash or synthetic ABS.

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