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The Administration's Arbitrary ABS Regulatory Proposal

Within the thick blanket of new regulatory proposals unveiled today was a plan that would require firms securitizing loans to retain 5% of the credit risk and prohibit hedges for that risk which would "undermine the economic tie between the originator and the issued asset-backed security". The issue of aligning interests in ABS trades is a valid one. However, when the Fed sees zero interest for the first round of CMBS TALF loans, and the administration has paid such lip service to the need to reignite the securitization market, picking a seemingly arbitrary amount of credit risk for ABS issuers to retain is a confusing first step at best.
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