SEC Commissioner Piwowar Discusses Securitization and "The Big Short"

SEC Commissioner Michael S. Piwowar discussed the benefits, risks and future of the securitization market, as well as recent developments in the credit rating agencies.

In his remarks at the ABS Vegas 2016 Conference, Commissioner Piwowar highlighted a number of the benefits of securitization, including its potential to reduce costs and increase access to credit for borrowers. He acknowledged the risks associated with securitization, and noted that the financial crisis "revealed that many market participants and regulators were not fully aware of the risks underlying residential mortgage-backed securities."

Commissioner Piwowar discussed various SEC actions to improve the asset-backed securitization ("ABS") regulatory framework in the aftermath of the financial crisis. He expressed concern regarding the "one-size-fits-all" approach taken for asset classes in the "credit risk retention" rulemaking. In particular, he considers the exception for qualified residential mortgages in the rulemaking to be the result of "arbitrary choices" made by "prudential bureaucrats" who took "the easy way out" by not allowing enough time to examine distinct asset class attributes. On the other hand, the Commissioner cited increased transparency through TRACE and disclosures through amendments to Regulation ABS as examples of more positive developments in the market. In light of these rulemakings, Commissioner Piwowar said, the SEC should evaluate their cumulative impact on the ABS markets. He also cited a general decline in public ABS offerings and pointed out that "unnecessary or inappropriate" regulation could have an adverse impact on the market even though the SEC must "appropriately" regulate these offerings.

Additionally, Commissioner Piwowar discussed "overreliance" on credit ratings, which in his view was "another key contributing factor to the financial crisis." He mentioned steps the SEC has taken in order to remove excessive reliance on credit ratings noting that the SEC removed references to credit ratings from the rules, as required by Section 939A of Dodd-Frank. "The removal of credit rating references from our rulebook – and, therefore, any implied government seal of approval of credit ratings – should encourage investors to view credit ratings in a more appropriate manner, merely one input in making an investment decision," he said. Commissioner Piwowar stated that "credit ratings continue to be used as benchmarks in many state and local laws and regulations and these entities should consider taking a hard look as to whether such use remains warranted."

On a lighter note, Commissioner Piwowar sought to correct a few misperceptions about SEC participation at the conference by asserting that staffers would not be lounging by the pool or seeking jobs with investment banks as portrayed in the film, The Big Short.