Reader eTrader alerted us to an important but under-reported development today, namely, that FAS 140 has been provisionally modified so as to kill SIVs. While this structure was effectively dead as of now, there remained the possibility of it being reconstituted in the future.
As FT Alphaville reports, the problem with SIVs is that they turned out not to be very off-balance-sheet after all:
It’s hard to get excited when there’s so many acronyms flying around. But the bottom line is that the FASB last week tentatively voted to remove the QSPE concept from FAS 140.
Now before you get partying, a little background.
Qualified Special Purpose Entities (QSPEs) are vehicles sometimes used for off-balance sheet securitisations, and as such, have come in for quite some flak over the past few months.
The QSPE enshrines the idea that in securing off-balance sheet or “sale treatment” for assets, the bank or originator must have given up control of those assets.
Yet when SIVs hit trouble, and the banks that spawned them were prompted by reputational concerns to step in and help out, the supposedly “sold” assets came back on board those institutions’ balance sheets.
Expains the FEI blog, the QSPE concept has also been criticised by some because the restrictions prohibiting the management of underlying “sold” assets (unless pre-specified in the securitisation documentation) were seen to have hampered the ability of lenders, say, to modify mortgage terms to help borrowers avoid foreclosure in the light of the credit crunch.
In cases where restructuring did occur, with the originator also acting as the servicer often making these calls, in what sense have the assets really been “sold”?
The blog MarketTicker claims that this change was implemented due to petitions and blogging. I’d be curious to get the backstory here.
FT Alphaville also warns that this move, due to be implemented within six months, will result in more assets coming back onto balance sheets (duh) and Variable Interest Entities may be next on the list to be remanded back to balance sheets.
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I suspect that the only story behind the “petitions and blogging” comment is that Denninger wants his readers to believe that his petition was a cause of the change.
The decision to drop QSPEs was reported by PJ at HousingWire on Feb. 6: http://www.housingwire.com/2008/02/06/revenge-of-the-nerds-qspes-an-endangered-species/
And according to Bloomberg has been under consideration since May 2007: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aIOWGBzzWpNo
The most interesting blogpost on the whole issue is Independent Accountant’s (keeping reading to the bottom):
http://skepticaltexascpa.blogspot.com/2008/02/treasury-and-banks.html
It is important that the FASB hasn’t tackled VIEs (i.e. conduits) yet. That VIEs should be next to be eliminated does not mean that they will be.
The ability of companies to hide liabilities (assets) off the balance sheet defeats the purpose of the financial statements. It is a fraudulent business practice no matter how it’s spun.
Actually it’s not just covenants/restrictions that indicate the possibility of ultimate ownership. More importantly, the financial reality of transactions should be scrutinised particularly when legal reality is contrary to that financial reality.
If benefits from an asset or entity continue to flow to the “orginator”, then the asset and its corresponding liability should be recorded on the originator’s BS , if an entity, it should be regarded as subsidiary or joint venture or associate depending on the shareholding and structure of the entity.
Legal quibbles should not obscure financial reality but that’s an ideal world which lawyers would probably hate!
Related story worth a look:
Tribune, Dole May Need to Draw Down Bank Credit Lines (Update1)
By Pierre Paulden and Shannon Harrington
http://www.bloomberg.com/apps/news?pid=20601087&sid=aafb4fPM5faw&refer=home
April 7 (Bloomberg) — Tribune Co. and Dole Foods Co. may need to draw down on bank lines to avoid default, causing a new drain on bank capital, according to Morgan Stanley analysts.
Sprint Nextel Corp., the Overland Park, Kansas-based wireless carrier, borrowed $2.5 billion in February from a $6 billion credit line arranged by JPMorgan and Citigroup, according to a regulatory filing. CIT Group Inc., the New York-based finance company, drew down four emergency credit lines totaling $7.3 billion last month after being cut off from customary sources of cash.
“A credit crunch is upon us,” Peters said on the conference call. “If you actually need access to capital you’re probably not going to get it.”
“Yet when SIVs hit trouble, and the banks that spawned them were prompted by reputational concerns to . . . .” That’s a fat assertion; prove it, sez me. No one with a choice takes _$100B_ in liquefying assets back on balance as Citi did for ‘reputational concerns.’ They did it, I feel sure, because their in-house counsel told them they were on the hook given the fine print ‘guarantees’ they included to get shmuck investors to buy the notes of these money sieves. If you ‘guarantee’ that an investment is sound, and it is not . . . court is not where you want to review your options.
To me, this point has been underreported and underanalyzed regarding the SIVs, that they may have looked off-the-books—but never were. Yet another area of wilfully_failed central bank regulation_, to me.