According to this bloomberg article, Citi has 320 Billion of unconsolidated VIEs. Heres the link. http://www.bloomberg.com/apps/news?pid=20601109&sid=alExwdst38cQ&refer=home Since those assets are considersed VIEs and assuming Citi is the primary benificiary, under FIN 46® is it even possible to have unconsolidated VIEs? Mind you I’m just taking the rules from what I read out of SS5 Reading 23.
You’re assuming Citi is the primary benficiary rather than just leasing assets from established corporations which is perfectly allowable.
Black Swan Wrote: ------------------------------------------------------- > You’re assuming Citi is the primary benficiary > rather than just leasing assets from established > corporations which is perfectly allowable. I am having trouble understanding this; what does this mean for Citi? Are they vulnerable to liabilities within the VIE?
Just my guess - What has been happening with these firms is the value of the subprime securitized notes has declined due to actual and expected impairment, and companies have brought these assets back onto the balance sheet. A VIE must be consolidated if it does not have enough equity at risk. The primary beneficiary is the reporting entity that receives the majority of expected returns/losses. The amount of the asset value decline has forced companies such as Citi to move these formerly unconsolidated entities onto the balance sheet because the losses from repricing were more than the equity investor could tolerate thereby Citi becoming the primary beneficiary. The pricing on the assets has been so bad that companies have taken losses on the write downs of the assets. If the assets are deemed to be impaired, the losses to fair value are taken on the income statement despite these not being actual cash losses.
I unerstand your explanation doseweissen, and it helps me see how this works. BUT (and this is not directed at your explanation, it is more of a complaint I have with the accounting rules), If the equity investor cannot tolerate the losses because they are too high, then it seems that it is already too late and this should have been consolidated prior to the writedowns due to the POTENTIAL for Citi to become the primary beneficiary. It seems like it is as if: Corporations don’t have to let anyone know about these things unless the $#*& hits the fan, which is the reason investors would want to know about it in the first place.
I think, actually, we’re really dealing with a semantic issue. As a practitioner (15 years as a fixed income portfolio manager, and often investor in a number of SIVs and VIEs), what I think is really going on here is that the curriculum basically defines a VIE as a SPE that must be consolidated. Industry convention doesn’t always observe that distinction. Or, as pointed out, they technically were consolidated by another entity (not Citigroup).
plyon Wrote: ------------------------------------------------------- > I think, actually, we’re really dealing with a > semantic issue. > > As a practitioner (15 years as a fixed income > portfolio manager, and often investor in a number > of SIVs and VIEs), what I think is really going on > here is that the curriculum basically defines a > VIE as a SPE that must be consolidated. Industry > convention doesn’t always observe that > distinction. Or, as pointed out, they technically > were consolidated by another entity (not > Citigroup). I agree - I worked for a SIV until it was unwound. There are three factors that call for consolidation of a VIE: decision making rights, loss obligations, and rights to returns. Since Citi has not recognized the vehicles, they must not hold these characteristics with the vehicles. Our SIV was recognized way back in the fall when the directors couldn’t make the case that our company wasn’t the primary beneficiary. I’m very sure that Citi has enough qualified people in their risk department to ask the right questions of the vehicle managers and prodded them enough to define whether the funds in question should be recognized or not. The SPEs in question must be the responsibilities of other parties (hedge funds, other banks, private institutions, etc.). Sucks for them.