Interview with Rep. Scott Garrett on Covered Bond Bill Amendments

In this exclusive interview, Rep. Scott Garrett (R-NJ) talks with Covered Bond Investor™ about the amendments offered by Rep. Melissa Bean (D-IL) at the markup session for the United States Covered Bond Act of 2010 (H.R. 5823), held July 28.

Rep. Scott GarrettOne of Rep. Bean's amendments was adopted during the session.  The other was withdrawn but will be the subject of further negotiations this summer.  Both amendments — reflecting concerns or objections raised by the FDIC — could have important potential impacts on the future development of a U.S. covered bond market.

At the markup session, the House Financial Services Committee (HFSC) voted in favor of reporting H.R. 5823 to the full House of Representatives.  That move opens the possibility of a House vote on covered bond legislation later in this session of Congress, after the outstanding issues are resolved.

Rep. Garrett has been a prime mover in the push for Congressional covered bond legislation and is the main sponsor of H.R. 5823.

Congressman, what is your general reaction to the amendments that were added to the covered bond bill during the markup session?

As you know, at the committee [session, Rep. Bean] offered two amendments.  [One, on rules for winding down covered bond pools if the issuer becomes insolvent] she withdrew.  [That] is good, [because] when someone withdraws their amendment, it gives the opportunity to move forward on that issue at a later date. 

[On the other amendment, regarding regulatory oversight], she agreed to a second-degree amendment [from me] with regard to timing [of a deadline for establishing the oversight program].  I think there is also some additional language there that I think she would like to have additional discussions on.  

So it opens up the opportunity during the course of the summer — August — to see if we can get language that is acceptable to all interested parties.

Let's talk first about the Bean amendment that did go through, which divides up oversight authority.  Some proponents believe it is important for covered bonds to be overseen by a single, strong regulator with clear, undivided authority.  Do you agree?

That's the way we set it up initially, right?  That was our position, and I understand the arguments that some people make that it is certainly cleaner if we were to continue in that. 

[But] there was some pushback from the FDIC.  So to reach accommodation on some of these concerns, we said okay, as long as we have uniformity as far as the regulations are concerned.  Just as in other areas of our banking system, where we have half a dozen regulators right now — the multifaceted system we have in the rest of our financial marketplace — we'll try to accommodate it here in covered bonds as well.

What do you say to objections that the Bean amendment basically fragments regulatory authority and is a step backward for good oversight?

Well, as I say, our initial position was not where [Rep. Bean] is.  Our initial position was to have unitary regulation of the system.   It would be cleaner and less fragmented.  But going forward, if we can bring it back to that point, and still address opposition from the other side on this, maybe we can try to reach some sort of accommodation.

Tell me about the other amendment, which Rep. Bean withdrew at the markup but you believe will be the subject of further discussion this summer.  What do you see as its major potential impact if it were accepted?

That amendment deal[s] with the "resolution" side — what happens with the resolution or winding up of a covered bond pool [in the event of issuer insolvency].  We certainly had some concerns from the initial language that we saw from the draft — almost a case of "heads we win, tails you lose" for the FDIC vis-à-vis the investors in covered bonds.  It was problematic to encourage the covered bond market to actually develop and find investors interested in it if that language were to prevail.

What do you mean here by "heads we win, tails you lose"?

The issue is, who is able to fully recover as you wind down a covered bond pool? The investors go in with a certain understanding — certainly this is the way it works in Europe - that the pool will continue to work for the life of the [bond] — seven years, ten years, or what have you — and [investors will] recover their investment and interest.  But FDIC has formed an official position, under certain circumstances, that would not be part of the range of incentives that investors would be looking to enter into if they were going to go into a covered bond contract.  [Investors] may get the short end of the deal.

You have spoken about concerns that the FDIC is seeking a kind of veto power which would enable them to repudiate covered bonds.

That's a slightly different issue.  It goes to the [earlier] question you had, with regard to regulation.  We don't have a vibrant covered bond market now in the United States.  We would be concerned that if FDIC were in the position to have carte blanche on rulemaking, the rulemaking would overly favor the FDIC and the DIF (Deposit Insurance Fund) and protecting that — and not conducive to creation of an active covered bond market.  In other words, we're concerned that if [the FDIC has] total control of rulemaking, the rules could be structured in a way that investors would not take part in the covered bond market.

Are there any other major concerns that you have at this point?

That's it.  That's really the nut of it.

Now that the covered bond bill has been reported out of committee, how soon do you think it is likely to come up for a vote by the full House?

That's really the $64,000 question.  At the end of the hearing, I thought Chairman Frank said something [to the effect that] those issues [related to Rep. Bean's amendments] would be discussed during the summer, and then the soonest [the bill] could come up on the Floor would be sometime in September. 

I'm not saying the Chairman made a promise.  But it would seem that [since] we have bipartisan support — most people are saying it would be good to get it done, it would be good for the marketplace, it would be good for the economy — that would seem to be the type of bill we should be able to move.

Is there anything else you want to say at this point?

You didn't go into [what is likely to happen in] the Senate — but I would only be able to tell you, "I couldn't tell you!"

Note to our international readers: "the $64,000 question" is a U.S. colloquialism meaning a very important question that is difficult to answer.  The questions and answers above were edited and slightly condensed from an interview with Rep. Garrett on July 29.