In mid-January 2003, the Financial Accounting Standards Board released its "final" draft of Financial Interpretation No. 46, which - though widely anticipated - tore through the industry like firestorm. And yet the interpretation, and the subsequent move by FASB to take the reigns of the QSPE project, have so far proven more symbolic than practical - symbolic, perhaps, of the inanity in efficient rulemaking while under political scrutiny. Devious accounting has been the backbone of too many corporate scandals in the last two years.

As the rules were published, the assets and liabilities in a typical multi-seller ABCP conduit - along with other non-QSPE securitization structures - would end up on the balance sheet of the sponsoring institution, an issue of great concern for U.S. GAAP compliant banks. At first glance, it appeared this consolidation would have an impact on risk-based capital ratios, as well as leverage ratios.

Since the January FIN 46 draft, which was to be implemented on July 1, FASB has issued a proposed interpretation and modification to FIN 46 - with comments due today (Dec. 1) - plus nearly a dozen FASB Staff Positions (FSPs), including a deferral for pre-existing VIEs to the first filing period ending after Dec. 15. Several of these FSPs are still pending final rules. Meanwhile, the QSPE project, formerly a study of the "permitted activities" of QSPEs led by the Emerging Issues Task Force, resulted in the issuance and subsequent scrapping of a proposed amendment to FAS 140. A second stab at this is pending. And lastly, the bank regulators have since taken the urgency out of the situation by ruling explicitly that ABCP asset consolidated as a result of FIN 46 will not be included in the risk-based capital analysis.

What's amazing is that a few banks actually managed to decode, untangle, restructure and implement under the original FIN 46 by the initial July 1 deadline. Ironically, making the deadline for most of the early adopters cost them some cash. Besides having to tinker with their documents to meet the latest draft of FIN 46, for expected loss issuers, the deadline cost six extra months of coupon payments.

Nonetheless, for accomplishing this daunting task, ASR will recognize these institutions as innovators. While the ABCP market is by nature tight-lipped, it is our understanding that HSBC USA, Citicorp and Bank of America were among the few, if not only, to meet the initial deadline through restructuring, or in BofA's case, through the creation of a new structure and transferring assets from previously existing conduits into it. KPMG was the auditor involved in these securitization restructurings.

It is also our understanding that the expected loss tranche model and methodology was developed through the work of several parties not necessarily involved in these first deals, including a few banks that haven't yet restructured. In particular, some players pointed to models developed by RBC Capital Markets as setting the beginnings of a framework for the expected loss calculation generally agreed upon by other constituents.

Clearly, the issuance of these specialized equity-like notes, which capture the projected variability at the most subordinated level of the conduit, has emerged the dominant solution to FIN 46. At least a dozen banks have followed this path, and more deals are in the works, sources said. Further, the expected loss framework, with appropriate tweaking, could become a fixture in the European ABCP conduit market, as accounting standards take shape alongside the second generation of Basle's risk-based capital guidelines.

"[The Europeans] have had the luxury of time," said one source. "They are contemplating that there could be similar requirements [to those of FIN 46], and are considering similar strategies."

On the U.S. side, banks that did not make the deadline had planned to consolidate the conduits to the income statement from July 1 through the date of restructuring, prior to FASB's Oct. 8 announcement that it had postponed the effective date. The January round of 10-Ks should add more color on this.

Bryant Park

While it literally came down to hours, HSBC may have been the first to successfully fund an expected loss tranche, closing its deal with an outside investor on June 30. This kept HSBC's Bryant Park Funding off-balance-sheet for its calendar third-quarter earnings. HSBC USA, subject to U.S. GAAP, is one of three legal entities in the organization, the other two based in Europe and Asia.

"Our accountants did not want to be in the position of putting something on the balance sheet and taking it back off," John Bottorff, head of securitization at HSBC. "Little did we know that in October FASB would issue a deferral."

Currently, Bryant Park has $1.9 billion in outstandings, with about $3.3 billion in commitments. HSBC expects to close on another $1 billion in commitments during the next few weeks, and expects to add about $700 million in deals, bringing Bryant's year-end outstandings to $2.6 billion. Removing the FASB factor has given HSBC the momentum to grow. In May, Bryant Park's outstandings were less than $1 billion.

Meanwhile, Citibank has executed multiple expected loss sales for its quiver of conduits, some on the cusp of the July 1 deadline, and others later that month. The ABCP sponsoring giant managed to stave off roughly $46 billion in ABCP assets and liabilities. With the restructuring in place, the implementation of FIN 46 caused Citibank to consolidate a measly $955 million to its balance sheet.


While Bank of America is on the path to selling expected loss tranches for some of its remaining conduits, BofA decided early on that it would pursue the "silo" approach to avoid consolidation under FIN 46, as approximately 40% of the firm's clients treated their sales to BofA conduits as financings on their own balance sheets.

The silo approach restructures the SPEs such that the sellers are deemed the primary beneficiaries in their facilities.

"The FASB seemed to be most concerned about assets disappearing," said one source close to the development of Yorktown. "With Yorktown, assets didn't disappear."

From the issuance of FIN 46 through March, BofA began tinkering with how to apply the silo idea to a conduit, and began building the structure in April, at which point BofA sent letters to all of its clients, detailing the changes in accounting and the possibility of restructuring. The conduit launched on May 23. From then through June 30, BofA transitioned $7 billion from other vehicles into Yorktown, totaling between 60 and 70 transactions. The terms of the financings were not restructured through the process.

During this period, BofA embarked on a six-city roadshow, which investors responded to well, given the conduit's size and liquidity.

Yorktown used the proceeds to purchase beneficial interests from an entity called YC SUSI in the form of individual "series" of "Special Units of Siloed Interests," or SUSIs. Each series will be based on an asset, or pool of assets, that are acquired from the seller.

The Yorktown conduit benefits from program-level credit enhancement from BofA, as well as seller-specific liquidity and enhancement facilities, according to a write-up on the conduit from Moody's Investors Service. Yorktown is approved to issue up to $18 billion.

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