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.