clarity & openness... NOT!

FASB Postpones Off-Balance-Sheet Rule for a Year (Update1) By Jody Shenn and Ian Katz July 30 (Bloomberg) – The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books. “Mamma taught me that if you don’t have anything nice to say, it’s best to just not say anything at all.” FASB, the Norwalk, Connecticut-based panel that sets U.S. accounting standards, voted 5-0 today to delay the rule change until fiscal years starting after Nov. 15, 2009. The board needs to give financial institutions more time to prepare for the switch, FASB member Thomas Linsmeier said at a board meeting. We need to get a new standard into effect,'' Linsmeier said, though it’s not practical’’ to begin requiring companies to put assets underlying securitizations onto their books this year. They pay us. We do what they say. Head in sand is the status quo. FASB proposed having companies put new securitization structures on their balance sheets for fiscal years starting after Nov. 15 this year. The Securities Industry and Financial Markets Association and the American Securitization Forum complained that the changes, which could affect as much as $11 trillion of off-balance-sheet entities, may make companies appear short of capital to regulators and lenders. Financial companies’ responses may in turn worsen the credit crisis by further constraining lending and investing, they said. Investors might start to think there is some sort of problem underlying this trivial little liquidity crisis! Investors are wary of unknown obligations after the world’s largest banks and brokerages reported $476 billion in writedowns and credit losses since the start of 2007, some stemming from their off-balance-sheet vehicles. Concern that the proposal might leave Freddie Mac and Fannie Mae with too little capital sent shares of the government-chartered companies down more than 15 percent July 7. Risks of Haste' ``The risks of too much haste are high,'' the securitization forum and Sifma said in a July 16 letter to the FASB. The ``abrupt consolidation'' of off-balance-sheet structures ``is likely to swell the balance sheets of the affected entities.'' The securitization forum is a trade group representing financial companies involved in packaging assets into securities. Sifma is Wall Street's largest lobbying organization. Both groups are based in New York. FASB's revised timeline for implementation doesn't affect when companies will need to consider whether existing securitizations will need to be consolidated under its tougher planned rules. That still begins for fiscal years starting after Nov. 15, 2009. Extremely Confusing’ Having two models in place at the same time would be extremely confusing to users of financial statements and difficult for Citigroup to explain,'' Robert Traficanti, Citigroup's deputy controller, said last month in a letter to FASB Chairman Robert Herz. The proposed changes would serve only to further chill an already-frozen real estate and other asset-backed securities markets,’’ Dottie Cunningham, chief executive officer of the Commercial Mortgage Securities Association, said in a July 21 letter to FASB. The securities group promotes commercial real estate financing. Many lenders made profits in the run-up to the subprime- mortgage crisis by selling pools of loans to off-balance-sheet trusts known as qualified special purpose entities, or QSPEs, which repackaged the pools into mortgage-backed securities. Some banks then sold those securities to other off-balance-sheet vehicles they sponsored, such as so-called asset-backed commercial paper conduits. Under FASB’s Statement 140, one of the rules the board is considering changing, the trusts can remain off-balance-sheet if their activities are significantly limited'' and entirely specified’’ in the legal documents that created them. The rules need to be clarified, said Robert Pozen, chairman of MFS Investment Management. Wall Street firms needed a few months to figure out how to get around'' the accounting rules adopted after Enron Corp. collapsed in 2001, Pozen, who heads an SEC advisory committee on improving financial reporting, said in a July 14 interview with Bloomberg News. The off-balance-sheet entities are orphan trusts’’ that represent ``securitization gone wild,’’ he said. To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net.