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Wednesday, July 30, 2008

FASB delays the OBSI rule

Banks have been given a one-year reprieve by US accounting standard-setters from having to take up to $5,000bn (£2,520bn) of debt assets on their balance sheets, easing short-term fears that they would be forced to raise large amounts of new capital quickly.

The Financial Accounting Standards Board voted to delay until January 2010 rules that would force banks to consolidate more off-balance sheet vehicles directly in their accounts.

Robert Herz, FASB chairman, said that the move was made reluctantly after a staff recommendation for a delay because there might not be enough time for all companies to adjust to the significant up-heaval.

He said: “It does pain me to allow something that has been abused by certain folks, to let that go on for another year”

http://www.ft.com/cms/s/0/71f44a4a-5e7c-11dd-b354-000077b07658.html

Citigroup caused a mini panic when their analysts said banks would have to take these assets on their balance sheets. Here was the story back in June:

Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months in a move that is likely to curb further their lending and could push them into new capital raisings, analysts have warned.

Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books.

The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them.

Birgit Specht, head of securitisation analysis at Citigroup, said: "We think it is very likely that these vehicles will come back on balance sheet.

"This will not affect liquidity because [they] are funded, but it will affect debt-to-equity ratios [at banks] and so significantly impact banks' ability to lend."

Ms Specht told a seminar at a conference on asset-backed securities in Cannes that the uncertainty about what might change was making banks uneasy about their investments. "Banks are not investing [in assets] right now because of funding issues and regulatory uncertainty."

http://www.ft.com/cms/s/0/33cab6b4-31d1-11dd-b77c-0000779fd2ac.html

OBSI (Off balance sheet items) are assets that banks have, that they own, that they pretend they don't. They do this by setting up QSPE (Qualified Special Purpose Entities) or VIE (Variable Interest Entities) or SPE (Special Purpose Entities).

Why is this done?

Because you don't know the value of the assets, or the parent companies obligation behind them. If this would be passed, it would give investors a real idea of the health of the financial institution. And right now, that wouldn't "be a good thing!" You can read about the FASB rule in the link below.
http://www.fasb.org/project/transfers_of_financial_assets.shtml

So postpone it a year when the assets are hopefully worth more!

The Fed's toxic paper from Bear Stearns (now JP Morgan) supposedly hasn't fallen a penny, but Merrill Lynch's toxic assets are worth just .22 cents on the dollar. And if we could actually see the assets on Maiden Lane LLC, we would know that the Fed was lying.

It's the same with the banks. They can't take the light!

Today, the Fed sponsored more alphabet soup. It extended the PDCF (Primary Dealer Credit Facility) and the TSLF (Term Securities Lending Facility) until January 30, 2009. It also extended the TAF (Term Auction Facility) paper's term from 28 days to 84.

I'm sure these will be extended also. So did you expect anything else with FASB Statement 140?

It's all just alphabet soup with different letters!

But don't let this news get you bearish. You now you have an opponent that can't be whispered down!

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