PrefBlog

Not much interesting today!

There is some excitement over a recent accounting initiative – how’s that for an attention-grabbing lead-in – which Naked Capitalism believes to mean the end of SIVs.

At issue is the ultimate effect of a FASB change in guidelines that will:

remove the Qualified Special Purpose Entity (QSPE) concept (used for some securitizations) from FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
…
The QSPE concept specified in FAS 140 had been criticized, particularly in light of recent market turmoil tied largely to origination (and related issues involving securitization) of subprime mortgages. To obtain ‘sale treatment’ or off-balance sheet treatment for assets transferred or sold to a QSPE, (and for asset transfers generally) the transferor (e.g. a bank or other originator of mortgages) must give up control over the assets, otherwise the assets would have to remain on the transferors balance sheet (and gain on sale would be limited). The QSPE concept as defined in FAS 140 provided a means to demonstrate control was given up by the transferor, however, the restrictions specified in FAS 140 prohibiting a QSPE from managing the underlying assets, unless pre-specified in the original documents of the securitization trust, or agreed to subsequently by a majority of the investors in the trust, was viewed by some as threatening the ability of lenders and servicers to modify the terms of mortgages to help borrowers avoid foreclosure in the recent credit crunch.
…
“For five years now we’ve struggled with application of [FAS] 140 [and] the fundamental question related to servicer discretion,” said board member Larry Smith. “We said, it’s almost impossible to structure a vehicle with the objectives the board had in mind when they created QSPEs: that is, an entity that has no decision making whatsoever relative to the run-out of these assets.”

He added, “I think the staff is appropriate in recommending that we do away with QSPE’s; there are no assets short of US treasury assets that somebody doesn’t make decisions over during the life of [those] assets.”

“We have a concept that really isn’t working, and we need to come up with some other way to help investors evaluate what these transactions are,” said Smith. “At the end of the day, I don’t think the current application of 140 is what the board that approved 140 had in mind, therefore I think we should just stop pretending, and eliminate QSPE’s from our literature, and rely on other aspects of the consolidation model to give [us an] answer that is appropriate.”

A major problem with the declaration that SIVs are dead is that SIVs are not equivalent to QSPEs:

QSPE (Qualified Special Purpose Entity)
A QPSE is described in FASB Statement of Standards No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, which includes conditions to limit the permissible activities of the QSPE, what the QSPE can hold, and when the QSPE can sell or dispose of non cash financial assets.

SIV (Structured Investment Vehicle)
SIV (Structured Investment Vehicle) are credit arbitrage vehicles. They issue debt in the U.S. and Euro medium-term note and commercial paper markets, and with the proceeds, purchase assets of varying maturities. These assets consist of traditional classes of debt and ABS. Derivatives transactions are used to eliminate both interest-rate and foreign-exchange risk. Since the SIVs are funding at the inexpensive AAA levels (commercial paper, junior notes and medium-term notes) but can purchase securities/assets at varying investment-grade rating levels, they can pick up credit spread over the life of that asset. Some SIVs are bank sponsored and some are privately sponsored. In either case, the SIV and its assets are usually off the balance sheet of the sponsor. For instance, on November 26, 2007, HSBC announced that it would place 2 of its SIVs back on its balance sheet and provide them with additional funding in the amount of $35 billion in order to restore investor confidence.

This could be important to Canadian investors, because there’s quite a bit of securitization done by Canadian banks via QSPEs – for instance, the Royal Bank 2007 Annual Report discloses $25-billion in securitized assets (page 82 of the PDF) which could, potentially, be affected by this change (they may reappear on the balance sheet, to be considered equivalent to covered bonds).

As far as I can make out, however, an independent SIV can still be an independent SIV … although these may find their liquidity guarantees to be more expensive in the future.

A slight upward move on the market today; volume increased a little, but not enough to take notice of.

There were twelve other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Monday, April 7th, 2008 at 10:04 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.