A move this week to hitch a Senate covered bond proposal to broader economic legislation that enjoys White House support was a sensible and welcome development at a time when election year politics could otherwise stymie progress, according to covered bond proponents, with benefits to be gleaned from the move even if it fails to come to full fruition.

Ralph Daloisio, managing director, Natixis, and a member of the American Securitization Forum, said that it was not unexpected that the sponsors of the Senate covered bond act would try to attach it to a broader piece of legislation with more momentum, because election year politics would make it difficult to move forward otherwise.

The JOBS act is a sensible choice of legislation to hitch onto, he added.

“It’s a good one to coat-tail because it is trying to get more capital to flow to small businesses, which are an important source of jobs in the US,” he said. “The sponsors decided that it was important to also focus on the creation of capital flows through the debt capital markets, which covered bonds could achieve because small business loans are allowed in cover pools.

“It’s a positive move, is logical and has merit – the standalone road is the slower road.”

Gareth Old, partner at Clifford Chance in New York, said that the move to propose the covered bond legislation as an amendment to the JOBS Act “does not get it out of the woods” but that it elevates the covered bond proposal to the prospect of a floor vote in the Senate and also helpfully does this outside the broader housing finance reform context.

Lewis Cohen, Clifford Chance

His colleague, Lewis Cohen, also a partner at Clifford Chance, said that continued momentum on covered bonds in the Senate is positive because this had been lagging behind that in the House of Representatives.

“It sends out a message that the Senate is serious about covered bond legislation,” he said. “A similar move first in the House would not have sent as positive a signal.”

The House Financial Services Committee in June 2011 passed covered bond legislation proposed by Republican Congressman Scott Garrett. Jerry Marlatt, senior of counsel at Morrison Foerster, said that the House covered bond bill (HR 940) could not be attached to the JOBS Act in the House of Representatives because of the stricter amendment rules in the House. Amendment rules are more relaxed in the Senate, he said, permitting amendments not directly related to the JOBS bill.

In the House, HR 940 remains tied up in the Ways & Means Committee. While the Ways & Means Committee is understood to not have any philosophical or political concerns with HR 940, with any issues mainly being of a technical nature, Marlatt said that if the Senate covered bond legislation is attached to the JOBS Act and the latter is passed in the Senate, the JOBS Act would then go to a conference committee for reconciliation, where any concerns of the Ways & Means Committee could be addressed.

He said that he would expect the Federal Deposit Insurance Corporation to respond to the latest covered bond move in the Senate by raising its concerns with the covered bond legislation – mainly centring on its right to repudiation – and that this could lead to it being withdrawn from the JOBS Act. Alternatively, covered bond legislation could be amended and remain attached to the JOBS Act or a separate Senate banking committee hearing on the matter could be scheduled, he said.

“It’s a good beginning in a year when there may not have been any movement on an independent covered bonds bill,” he said.

Old at Clifford Chance said that the next steps involve the leaders of the Senate putting the amendment forward to the main sponsors of the JOBS Act, and that a somewhat opaque procedure would follow to determine if the covered bond act makes it onto a final list of tabled amendments.

“It is unequivocally a political process, but even if the covered bond act does not get attached you can benefit from learning at which stage of the process it gets knocked out,” he said. “The process would indicate the strength of support and pockets of opposition.”

His colleague Cohen put it thus: “It smokes people out.”

Daloisio said the odds are against the covered bond legislation surviving as an amendment, with broader Democrat support needed to carry it in the face of otherwise encouraging news that the FDIC’s concerns would not be sufficient to block progress.

However, the move made by the Act’s Senate sponsors on Wednesday will still have been beneficial, he said.

“It maintains visibility,” he said. “The worst thing for the initiative would be if the proposed legislation lived in the dark corridors of Capitol Hill.”