PHOENIX, Ariz. - A market contending with massive volatility and continued headline risk has found a new monkey on its back. Or, rather, a gorilla. Discussions about the health of the CDO market during ABS West revolved around the new consolidation guidelines from the Financial Accounting Standards Board, the topic du jour, as one moderator noted.

The jury is out on what the recent FASB decision will mean for this asset class. By all accounts, its recently released opinion appears to have perplexed CDO market players more than it has framed issues.

As attorney Steven Kolyer of Clifford Chance noted, on one hand the CDO market may have avoided the full negative impact but, "on the other it depends on the type of the CDO and the amount of equity in the capital structure," he said. "That's just beginning to appear as another question."

Talk during the panel discussion touched on FASB's focus on variable interest entity (VIE). Panelists debated whether or not CDOs are even VIEs at all. As has been discussed over the past month, a very likely scenario is that a collateral manager, who doesn't take equity in a deal but is adding up fees, will be forced to consolidate.

"It could be disasterous to have your balance sheet balloon out. For certain managers, this could have huge impacts and they may not be able to manage [these vehicles] anymore," said Jean Fleischhacker, of Bear Stearns.

"But it's like a mutual fund. For them to have to consolidate doesn't make any real sense to me," said Darius Grant, of Salomon Smith Barney.

"The accounting interpretation does not go into specific detail," said Kolyer. However, passive vehicles essentially are not impacted, he said.

Interest by investors in static pool structures is expected to increase this year, panelists agreed, and Kolyer pointed to client interest in the fund to fund CFO market.

All in all, it appears answers may not arrive until next year's conference. And it was quite clear from the dialogue between panelists, which included fund managers, investors, traders and issuers, that the FASB topic has migrated from market talk to legal departments, at least for now.

Yet the ultimate impact will come from the CDO market itself, a thought Grant found comforting:

"There's a lot of clever people working in this industry and a lot of brain power to deal with what develops."

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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