Reminiscent of a January release from the Senate Permanent Subcommittee on Investigations, the Joint Committee on Taxation's recently published inspection of Enron Corp.'s tax maneuvering includes several direct jabs at securitization accounting, and in places assumes a strong stance against the current Financial Asset Securitization Investment Trust (FASIT) structure.

Cited from the report, "the staff believes that the abuse potential inherent in the FASIT vehicle far outweighs any beneficial purpose that the FASIT rules may serve, and thus recommends that these rules be repealed."

The committee argues that Enron exploited the FASIT structure by treating entities it created and controlled as unrelated for tax purposes by "interposing an additional entity."

FASITs are not used as much as anticipated when the rules were enacted in 1996. The FASIT was created to allow non-mortgage originators some of the same benefits associated with Real Estate Mortgage Investment Conduits (REMICs).

In one example, Enron apparently used the FASIT structure to help it deduct interest on payments it made to itself (after lending to itself). For a structure called Apache, Enron established an overseas (Dutch) SPE containing $750 million indirectly contributed by Enron and $500 million borrowed from a small syndicate of overseas lenders. The new entity then purchased $1.23 billion in senior notes in Enron's Sequoia Financial Assets (FASIT). Sequoia was then purchasing trade receivables from two U.S.-based Enron subsidiaries, allowing it to benefit from factoring deductions.

As envisioned, these and other tax savings through Apache would let Enron deduct at least the total of the interest and principal payments it would have made to the syndicate of borrowers had it borrowed the $500 million directly.

As of Jan. 13, Apache was still in place, though cash had stopped cycling through it, the committee reported. Interestingly, the lenders in the entity that purchased senior notes in Sequoia, including J.P. Morgan Chase Bank, are battling for the accounts receivables, arguing these assets sold into the FASIT are still retained by Enron as the FASIT servicer but should not be part of the bankruptcy estate. This is eerily similar, at least on the surface, to the highly publicized bankruptcy battle involving receivables in an LTV Steel securitization vehicle - although in the Enron example, no one looks particularly good.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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