A handful of comment letters surfaced last week addressing the Financial Accounting Standard Board's controversial proposed amendment to FAS 140. The Exposure Draft has drawn heated responses from the securitization industry. The industry warns that even the most typical and fluid transactions, such as certain Agency mortgage-backed securities, which aren't structured through SPEs, could fail to comply with the new standard, should the final resembles the draft.
As for the ABS/CMBS side, where QSPEs make up the bulk of the term market, the American Securitiza- tion Forum and the Bond Market Association state in a letter submitted jointly, "[I]f the Exposure Draft is given its broadest reading, we doubt whether any current qualifying special-purpose entity would qualify under the proposed new standards."
As previously report by ASR, the market is much more weary of FASB's Exposure Drafts than perhaps a few years back, when the Board was under less political pressure to right the wrongs of corporate abuse. Then, the Board was more likely to meet the industry halfway, following the commentary period. The final drafting of FIN 46, however, made few concessions, and since being issued in January, has caused the consolidation of several hundred billion dollars (read Citibank, GE, Ford, Banc One, etc.), as well as the costly restructuring of ABCP conduits whose sponsors have gone the extra 10 miles to keep the exposures off-balance sheet.
Moreover, the expense involved in adhering to continually changing accounting standards was a common theme among several of last week's letters.
"The number of recent revisions on this issue - Statement 125, issued in 1996, was replaced by Statement 140, clarified by Technical Bulletin 01-1, and affected by Interpretation 46 - raises questions about whether the concepts on which these pronouncements are based have inherent flaws that call for reconsideration of the Board's entire approach," writes John McEnerney, chief of regulatory accounting at the New York State Banking Department. This sentiment is reiterated in the comment letter from the New York State Society of Certified Public Accountants, which McEnerney helped draft.
The NYSBD and the NYSSCPA believe FASB should adhere to its principle-based approach and overhaul the existing framework, introducing a new comprehensive statement that avoids safe harbors, such as QSPEs, altogether.
Even the ASF/BMA suggest an entirely new approach should be considered (especially if the Board fails to make its suggested changes to the amendment). The ASF/BMA outlined a potential "Matched Presentation" approach, similar to the U.K.'s "Linked Presentation," which would break down SPE exposures in a separate section on the asset side of the balance sheet.
Halftime score: 10-to-1
A total of 10 letters were posted at FASB as of press time, including those mentioned above, plus letters from FleetBoston Financial Corp., Morgan Stanley, the Real Estate Roundtable, USAA Investment Management Co., Kay Scholer, U.S. Bancorp and Democrat Sen. Carl Levin. The Commercial Mortgage Securities Association also submitted a letter late Thursday afternoon, though it had yet to be posted by FASB.
In summary, the Real Estate Roundtable and the CMSA are most concerned with the impact on the CMBS market, should the SPEs fail to qualify under the amendments. "The ability to account for such transfers as sales is clearly a decisive consideration for every issuer of CMBS, and the inability to achieve sale accounting would severely distort the economics of securitizing CMBS," the Roundtable writes.
USAA seems to focus on the dangers of too quickly implementing these types of changes. The asset manager expresses concerns over the disappearance of high-quality investments, especially on the ABCP side.
In most cases, last week's letters take positions that are, at moments, in stark contrast to Sen. Levin's laudatory comments posted by FASB several weeks ago (see ASR 7/21).
For example, the ASF's view that, per the amendment, all currently qualifying SPEs could lose the Q exemption, is quite the opposite of Levin's view that the proposed amendment "appears to strike the right balance between limiting sham QSPE transactions undertaken to conceal debt or contingent liabilities, while allowing legitimate, risk-dispersing securitizations to continue."
Levin is the ranking Democrat on the Senate's Permanent Committee on Investigations, the task force investigating the SPE-masked shady dealings of the evildoers at Enron Corp. As such, in his letter, the senator reemphasizes the dangers of the existing QSPE guidelines in facilitating Enron-like transactions.
The ASF and BMA plan to meet with the federal bank regulatory agencies and the Securities and Exchange Commission to discuss their concerns and recommendations.
"As a policy matter, we do not agree with FASB that any or all of these changes need to be made," the ASF/BMA write. "Nor do we agree with the general pro-consolidation orientation reflected in the Exposure Draft. In addition, we have serious practical concerns about the manner in which FASB is seeking to achieve its ... main goals."
Similar to the ASF letter, Morgan Stanley and Fleet raise significant concerns about the practicality of the Exposure Draft, and they warn of the detrimental effects to the securitization markets should FAS 140 be amended as proposed.
"We are concerned that the Exposure Draft, if issued, will result in less efficient markets for the securitization of financial assets," writes David Moser, principal accounting officer at Morgan Stanley. "Although it is unclear in a number of respects, we are concerned that the requirements in the Exposure Draft may prevent altogether the securitization of credit card receivables or any revolving loans."
Fleet Financial is also particularly concerned with the impact on revolving trusts, and believes that Master Trusts, where new issuances are not used for the repayment of existing beneficial interests, should not be included in the scope of FASB's take against reissuance. Also, Fleet recommends that, "a grandfathered QSPE be permitted to accept transfers of assets which do not result in the issuance of new beneficial interests."
The firm warns of a spate of early amortizations resulting if revolving credit card trusts were no longer able to add new receivables.
Morgan Stanley, which aligns itself with the ASF and BMA as a member of both groups and a contributor to their letter, takes issue with the fundamental premise of the Board's approach, which is to "equate the risk-and-rewards of certain types of involvement with an SPE as evidence of control," Moser writes.
As a next generation to FAS 125, FAS 140 moved away from risk-and-rewards, preferring a control-based analysis.
Morgan also takes issue with - or, rather, would like to take issue with - the Board's objectives, but states, "Unfortunately, because the Exposure Draft fails to include any basis for conclusions for several of the proposed requirements as they affect these transactions, we do not have the benefit of understanding the Board's objectives."
FASB's amendment to 140 has two stated goals: to further restrict the kinds of support that transferors and their affiliates and agents can provide to QSPEs, and to prevent certain entities that can reissue beneficial interests from operating as QSPEs in response to the adoption of FIN 46. The comment period officially ended June 30; though, according to a FASB official, often the bulk of letters arrive post-deadline.
The cost of restructuring
As mentioned above, several of the letters address the issue of added costs in restructuring. Both Morgan Stanley and the ASF/BMA believe that FASB has overlooked this aspect.
Perhaps more mildly than Morgan Stanley, the industry groups write, "[W]e are concerned that the board has taken too casual an attitude towards the direct and indirect costs to reporting entities in responding to the series of changes in GAAP affecting securitizations over the past six years." The ASF/BMA does not agree with FASB's assessments that the costs of implementing the amendments are minimal.
"The Exposure Draft dismisses the costs associated with a decision to restructure existing entities' as not costs of implementing the Statement,'" writes Morgan Stanley's Doser. "This is naive at best."
Officials at FASB declined to comment on any of the letters the Board has received. FASB's considerations will be discussed at the Aug. 28 roundtable on the Exposure Draft.