In securitization land, the rain keeps falling. Last week Bank One's accounting practices with regards to its credit card securitizations was the subject of Wednesday's Heard on the Street column of the Wall Street Journal.

In perhaps a twist of irony, just a few weeks back, researchers at Banc One Capital Markets put out a comment titled In Defense of Securitization (see ASR 2/25/02). In it, analyst John McElravey and Alessandro Pagani wrote "Go ahead and shine a bright light on securitization. The market should welcome this scrutiny."

BOCM argues that a focus on securitization will highlight the differences between this market and the shady dealings at Enron Corp.

The Bank One accounting issue, according to the WSJ article, is that the bank maintains an unusually large seller's interest in its securitizations, and accounts for a portion of its securitized loans as available-for-sale that should be consolidated back on to the balance sheet (which raises its capital requirements).

Bank One has securitized approximately $37 billion of its $70 billion in credit card loans, and is booking approximately $24 billion in seller's interest. According to the WSJ, Bank One is accounting for about $18 billion of its securitized credit cards as investments available-for-sale. Recall that Bank of America, which securitized a mammoth $20 billion-plus home-equity loan portfolio onto its balance sheet in December, accounted for approximately $17 billion of those assets as securities available-for-sale.

Cited from US Bancorp Piper Jaffray equity research, "We concur that Bank One has regulatory risk to loans being placed back on balance sheet, however we believe that a large percentage of the credit card securitizations mentioned in the [WSJ] article represent Qualified Special Purpose Entities (QSPEs) which are specifically not included in anticipated Financial Accounting Standards Board regulation."

US Bancorp believes Bank One will more likely have to bring its CDOs and ABCP conduits back on balance sheet, but that the bank's current Tier One capital would still be at adequate levels should that happen.

FAS 94 slows CDOs

Meanwhile, market players continue to debate the impact of the FAS 94, should it be written into law. In fact, some parties believe the provisions will change significantly before they are finalized, perhaps revised to eliminate the unintended consequences that the market is currently grappling with.

"It is clear that FASB will impose a more stringent set of rules for consolidation, but their final form is unclear, and it is far too early to ring the death bell for the CDO market," researchers at UBS Warburg wrote last week in a special "CDO Note" specifically addressing the FASB issue. Further, UBS believes the implementation of the new rules (in whatever form they end up taking) will not likely happen by the end of the third quarter, as some market participants speculated. "These rules are unlikely to move along as quickly as many anticipate, as FASB rules never do."

However, according to a partner at a major U.S. accounting firm, the momentum behind the FASB attacks on SPEs is too strong to be meaningfully curbed by financial industry lobby groups, such as the Bond Market Association, or its newly formed affiliate, the American Securitization Forum.

"It is my gut feeling that something is going to happen and it will happen to the extreme," the accountant said. "FASB sees all SPEs as bad and there is likely to be substantial balance-sheet consolidation to come of this project."

Of course, FASB does distinguish between SPEs, and is clear that the consolidation discussions only apply to SPEs that don't qualify for QSPE treatment.

FASB's revised interpretation of FAS 94 and non-qualifying SPEs has created significant concern at all levels of the CDO industry, including the rating agencies, which have rapidly grown their groups over the last few years to handle the robust volume. Moody's Investors Service, for example, has approximately 120 CDOs in its rating pipeline. Because several deals are currently on hold, participants in CDO groups across the board are watching the developments closely.

All eyes on Wednesday

The next scheduled FASB meeting will take place this Wednesday, with multi-seller arrangements, including ABCP conduits, on the slate for discussion.

According to an analyst in the ABCP market, the industry is concerned that FASB might negatively impact volume, as companies worry about having assets that they've sold into multi-seller conduits absorbed back onto their balance sheets.

Also, securities arbitrage deals, which are single-purpose programs that banks use as investment vehicles, could face some challenges, market sources said, because the sole beneficiary of the structure is the bank running the conduit. Significantly, the investing force of securities arbitrage programs has grown dramatically over the past few years, representing one of the biggest investors in triple-A ABS and CDOs.

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