Posted by Kenneth Anderson:
Special Purpose Entities and Off-Balance Sheet Accounting:
http://volokh.com/archives/archive_2009_05_31-2009_06_06.shtml#1244143861
The WSJ reports today that [1]financial services industry groups are
pressuring Congress and the administration to delay or weaken the
effects of an accounting rule change slated for next year that would
force banks and other financial services firms to keep, or take back,
on their balance sheets assets shifted into special purpose entities
(SPEs or SPVs):
[T]he group of financial organizations is trying to put the brakes
on the off-balance-sheet accounting measure, which would force
banks to bring hundreds of billions in assets back onto their
balance sheets at the beginning of 2010, effectively forcing them
to set aside more capital. Some accounting experts say they aren't
surprised by the banking industry's latest effort. "Here we go
again. They will get out their checkbooks and go to the Hill," says
Lynn Turner, the Securities and Exchange Commission's former chief
accountant.
The rule would apply to existing off-balance-sheet entities, known
as qualifying special purpose entities, which were generally used
by banks to package and sell off to investors loans they had made.
In general, I favor the rule change, as I also favor the earlier
mark-to-market rule relaxation - although each with important
reservations and caveats. The well-known accounting expert Robert
Willens commented in the Journal article:
The rule "includes securitization vehicles that played a large role
in the bubble and allowed banks to operate with low levels of
capital even though they had exposure to these assets that weren't
on the balance sheet," says accounting analyst Robert Willens.
I partly agree and partly disagree with that characterization, which
explains my cautious, caveated view of the rule requiring that SPEs be
consolidated. I don't think, on what I've seen so far at least, that
it was securitization as such (including asset securitization that
goes beyond simply the basic concept of pooling loans and selling
interests in the pool, to include the much more [2]legally specific
concept of securitization involving a sale by the originator of the
loans into a SPE legally insulated from the originator) that was most
important in leveraging up the financial services industry and
financial markets. More important than the bottom level
securitizations, so far as I can currently tell, were the credit
derivatives built on top of the securitizations. I might turn out to
be wrong about that, but it's my current sense of the leverage (see
this post on the excellent [3]Accrued Interest blog for a sense of
[4]just how dicey these could be).
In looking to prevent a re-run of the crisis, I think I would start
(on this particular regulatory bit of things) at the top of the
leverage chain and ratchet down from there, rather than starting with
securitizations as such and working my way up. There would still be
good reasons to require consolidation of SPEs back onto originator
balance sheets in some circumstances, I'm sure, but I think I'd start
in (this area of) regulatory reform with the most (over)-leveraged
parts. But I'm very, very interested in hearing views on this, as I
could be persuaded otherwise.
References
1. http://online.wsj.com/article/SB124407146605483021.html
2.
http://www.amazon.com/Securitization-Structured-Finance-Capital-Markets/dp/0820548510/ref=sr_1_1?ie=UTF8&qid=1244143343&sr=8-1
3. http://accruedint.blogspot.com/
4.
http://accruedint.blogspot.com/2009/04/leverage-doesnt-kill-investors-bad.html
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