The growth of complex tax-exempt transactions, such as pool transactions, variable-rate programs, and housing deals, as well as the increasing number of structured finance transactions, poses an ever increasing challenge to corporate trustees. At the same time, congressional and White House interest in new tax-exempt housing programs suggests we may see a new wave of these complex financings. The combination of these factors may put added strain on corporate trustee departments and force them to reevaluate their operations.
For years, MBIA Corp. has worked with the American Bankers Association's Corporate Trust Committee in a cooperative effort to draw attention to the problems that exist in trustee administration of structured and other complex transactions in the tax-exempt area. While the message from MBIA has focused on particular concerns in trust administration, the theme remains consistent: Senior corporate trust executives must recognize the complexity of debt financing and prepare their organizations to address the challenges in today's marketplace. In doing so, this will benefit not only the trustee bank, but all market participants - bondholders, rating agencies, credit enhancers, and secondary market traders.
The problem is not the corporate trust administrator who lacks extensive experience in administering complex, structured transactions - this is a symptom. The problem is senior managers who continue to tinker at the fringes of organizational change when the world around them demands a transformation.
It seems inconsistent with the trustee's fiduciary responsibility to allow a corporate trust "generalist" to perform a job that demands: 1) specialization, 2) a reasonable account load, and 3) ongoing training and exposure to the nuances of structured and complex transactions. It is time for senior trust managers to emerge into the brave new world of complex global finance. As one enlightened senior corporate trust manager said recently, to quote Pogo, "We have met the enemy and he is us."
Everyone who participates in these complex transactions approaches the business differently, than the trustee. Everyone in the process is a specialist, except the trustee. We are in a business shaped by "financial engineers," specialists who construct solutions to financial opportunities.
Lawyers specialize: If I need a litigator, I don't hire a tax lawyer. If I am issuing structured debt, I don't want a financial adviser or investment banking team that concentrates in municipal general obligation deals. The rating agencies have teams of credit professionals who focus on a particular type of security. Secondary market participants, whether they are on the buy or sell side, also have to specialize.
At MBIA, we feel strongly that specialization is more efficient as well as more effective. Specialists can be more efficient because they know what to look for in a structured transaction. A generalist, unfamiliar with structured deals, would have to wade through hundreds of pages of highly technical documents just to become familiar with a transaction. That would almost certainly result in higher administrative costs. It would be ineffective to ask any credit analyst to review a public power credit in the morning and go over a pooling and servicing agreement for a CMO transaction in the afternoon. MBIA also has specialized surveillance teams led by professionals with at least five to 10 years of experience in their responsibility.
To make specialization work, account loads must reflect the challenge posed by the bond type. At MBIA, the average account load in the structured finance surveillance department is less than 30 credits, while our traditional municipal surveillance professionals are typically responsible for more than 200 credits. We understand that corporate trust professionals typically administer 60 to 80 accounts, including a mix of bond types. Consequently, trust organizations will have to change to meet the needs of the rapidly developing structured finance industry. Senior managers must be agents for change. Despite the unsettling nature of change and the well-worn belief that specialization in corporate trust will not work, our response is simple. The world is more complex, there is no right way to change, but there are ways to improve the effectiveness in administering structured transactions in a corporate trust department:
* Reshape the organization and form a team that specializes in structured transactions. If that's too dramatic, designate or hire a structured finance "sharpshooter" who can keep you out of trouble in the short-term while you develop a longer range plan.
* Encourage your structured finance team members to attend training and development seminars sponsored by the rating agencies, the Practising Law Institute, or other recognized organizations. Urge the American Bankers Association to develop special training programs just for structured finance.
* Redistribute account loads to reflect the complexity of the structured transaction. Designate the more experienced trust administrator as your structured specialist and assign another administrator a larger number of "more typical" credits. While on the face of it that may seem unreasonable, it most likely reflects a fair distribution of the workload.
To ignore the complexity of structured transactions puts any trustee in a high-risk position. A trustee runs a serious risk of breaching its fiduciary responsibility which, in turn, may expose the bank to costly litigation and additional liability for damage to the trust estate.
Even more harmful than these costs may be the impact on the reputation of the trust institution, and the loss of trustee fee revenue as issuers seek out only the most competent and well respected trust institutions to administer their programs. Specialization is a small price to pay when faced with potential litigation, loss of reputation, and trustee fees.