A professor I once interviewed said the financial industry's approach to securitization regulation was like that of the man who kills his parents and then begs the court for mercy because he is an orphan.
The analogy holds amazingly well today. And the strategy works, with the court, or, in this case, the SEC, sympathetically offering the industry a reprieve.
A little history: In 2003, as FASB wrestled with a way to establish who is actually responsible for special purpose entities, what was then the Bond Market Association argued strenuously to exempt securitization trusts (so-called "qualified" special purpose entities) from what ultimately became FIN 46R.
"We gave [QSPEs] temporary diplomatic immunity," FASB chairman Robert Herz told CFO at the time. "Now we are going to make sure they are qualified diplomats."
That meant FASB would ensure QSPEs were what the industry said they were: passive conduits that simply accept collected funds and pay out returns to investors. No problem, said the industry, and all was well in securitizationland.
But what if your hard-won special exception to accounting rules suddenly stood in the way of panicked politicians faced with thousands of people losing their homes in the run-up to a presidential election year? That was the dilemma faced by the American Securitization Forum (itself a sort of special purpose entity of the bond market lobby) this past spring.
The ASF's answer? Ask for an exception to the exception.
To be fair, that wasn't ASF's initial response — its original guidance conservatively tried to avoid compromising the passive role of QSPEs. That kept the trusts off bank balance sheets, but made foreclosures far more likely. And that, in turn, risked spurring Congress into some form of action that could represent a death penalty for securitization. So, the ASF begged the SEC and Congress for mercy: Let us bend the special rules we once asked for.
Fortunately for them, bending the rules works out for just about everyone other than sticklers for intellectually honest accounting. And who cares about that when faced with a perfect storm of dispossessed homeowners, too-big-to-fail banks, and other orphans?
|
Video
