BOCA RATON, FLA. - In a meeting last week, the Financial Accounting Standards Board decided to delay implementation of its consolidation guidelines for VIEs, the notoriously controversial Financial Interpretation No. 46. Initially reported in the Conference Daily put out Oct. 9 at ABS East, the postponement applies to all VIEs held by public companies in all entities acquired before Feb. 1, 2003.

"The Board agreed to provide this deferral to allow time for certain implementation issues to be addressed through the issuance of a modification to the Interpretation, and indicated that it expects to issue this modification in final form prior to the end of 2003," E&Y wrote.

For calendar-year companies, the provisions would have to be adopted by Dec. 31, as determined by a 4-3 vote by the board.

Craig Platt of Keybank, a panelist at the opening ceremonies of the conference, noted the difficulty a company would face in backing out of newly prepared financial statements eight days into a quarter.

Ironically, while FASB was debriefing, many participants of the ABCP market - arguably the hardest-hit segment of securitization - were at ABS East in Boca Raton, discussing the repercussions of trying to implement FIN 46 knowing that the rules have yet to be finalized.

The board will work on an Exposure Draft for the amended FIN 46. According to one industry accountant, CDOs could benefit from some of the proposed changes, but for banks, this is more likely a temporary reprieve.

Contacts at FASB did not return phone calls as of press time.

Back in Florida

Meanwhile, roughly 100 early risers gathered for the ABCP/SIV conference held Oct. 8 - a conduit market prelude to the following day's launch of Information Management Network's ABS East.

Banc of America's Steve Austen introduced his opening panel of speakers as if running through a ballgame lineup - this being the morning after the Marlins beat the Cubs in extra innings, and the day of ALCS game one: the Boston Red Sox versus the Yankees at Yankee Stadium in the Bronx.

Unfortunately, first pitches were thrown long after ASR's deadline, though several market participants were glad to offer projections (see chart below).

Jason Kravitt of Mayer Brown Rowe & Maw, who is the lead-off pitcher in Austen's analogy, offered up his own witticism concerning FIN 46, the ABCP market, baseball, and, perhaps, religion. Kravitt described a Cubs fan asking God, "Will the Cubs ever win the World Series?"

God replies,

"Yes, but not in my lifetime."

"Are we ever going to stop restructuring? The answer is yes, but not in my lifetime," Kravitt said.

Interestingly, not everyone agreed about how much restructuring has actually taken place. Everett Rutan of Moody's Investors Service described FIN 46 as "something like 18 months of terror and then nothing."

According to Rutan, while Moody's had been anticipating a heavy flow of restructurings to sign off on, the agency has seen just 17 conduits tinkered with, sponsored by 11 different institutions, and only eight have actually closed. "For whatever reason, very few deals have come to us," Rutan noted.

Meanwhile, Thomas Irvin of Liberty Hampshire Co. stated that Liberty has been an investor in five expected loss tranches designed to make Liberty the primary beneficiary. Most of these have been structured as subordinate debt issues rather than equity.

Irvin described three different categories of conduits: those with FIN 46 solutions either done or in process; those taking a wait-and-see approach, though likely to execute a transaction eventually; and those that do not see any reason for restructuring.

"In our experience, the number [of conduits not planning to restructure] gets smaller and smaller," Irvin added, attributing the increased interest in non-U.S. GAAP banks to new guidelines from the International Accounting Standards Board. "We're seeing more institutions that are thinking about doing something."

Liberty is a private company and is not concerned with bringing assets onto its balance sheet. As such, the program has been able to make some opportunistic purchases from other conduits that need to shed assets as part of their restructurings.

Agreed-upon highlights

While not everyone agreed on how much restructuring is actually happening, there were some noted trends that seemed to reappear throughout the morning sessions.

For example, several panelists noted that sellers are dramatically less balance sheet-driven now than in past years. As such, quarter-end volume spikes have diminished.

Interestingly, several different panelists arrived at the following idea: As a potential positive offshoot of FIN 46, conduits that have sold expected loss tranches might be "cleaner," having a third-party at-risk investor who in some cases can veto deals going into the program.

Roger Pellegrini of Royal Bank of Canada took this view, predicting that conduits will have better performing assets in them to keep the equity at minimal size. Asset characteristics that result in smaller first loss tranches include: better ratings, senior positions and short terms.

Merrill Lynch's Stewart Cutler noted new single-seller mortgage conduits, which are meant to fund issuers between term deals. New Century Financial and Ameriquest Mortgage are among the newer issuers to launch these types of conduits.

Cutler also pointed out increased ECP issuance, particularly backed by non-U.S. originated assets, both on the multi-seller and securities arbitrage side. The dip in U.S. ABCP might in part be attributed to foreign banks tapping the ECP market. Cutler also noted the increase in medium-term note issuance, which might have accounted for some of the dip as well.

Finally, convergence between U.S. accounting rules/regulations and international accounting rules/regulations will become a hotter topic in the next few years.


Though uncertainty in financial accounting is still a primary concern for the ABCP marketplace, the proposed regulatory capital charge against liquidity support - which was incorporated in the bank regulators' relief package from FIN 46 - has brought program liquidity back to the front burner.

According to Mayer Brown's Kravitt, the current 20% conversion factor against liquidity that the bank regulators are proposing will probably be lowered. At 20%, a bank holds 1.6% against liquidity it is providing. Kravitt expects this fall to the 80 basis point level.

Gregory Coleman of the Office of the Comptroller of the Currency (OCC) urged the industry to submit commentary on the proposals. The deadline is Nov. 15.

Either way, it's likely that new structures and approaches will be used to lower the liquidity requirement. Merrill Lynch's Stephen Newman pointed to Friedman Billings' Georgetown Funding, a mortgage conduit that is structured in such a way that it requires no third-party liquidity support, using a combination of dynamic overcollateralization and market-value tests, among other enhancements.

Merrill's list of requirement-reducing mechanisms include matched funding, extendible commercial notes, secured liquidity notes, market value structures, derivative support, MTNs, and linking liquidating coverage to asset/liability gap.

The cutting-edge vehicles will use a variety of the above. "We're going to see a lot more programs like [Georgetown] now that liquidity will be a capital drawing," Newman said. "Everyone will be focusing on these."

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.