The WSJ reports today that financial services industry groups are pressuring Congress and the administration to delay or weaken the effects of an accounting rule change slated for next year that would force banks and other financial services firms to keep, or take back, on their balance sheets assets shifted into special purpose entities (SPEs or SPVs):
[T]he group of financial organizations is trying to put the brakes on the off-balance-sheet accounting measure, which would force banks to bring hundreds of billions in assets back onto their balance sheets at the beginning of 2010, effectively forcing them to set aside more capital. Some accounting experts say they aren't surprised by the banking industry's latest effort. "Here we go again. They will get out their checkbooks and go to the Hill," says Lynn Turner, the Securities and Exchange Commission's former chief accountant.
The rule would apply to existing off-balance-sheet entities, known as qualifying special purpose entities, which were generally used by banks to package and sell off to investors loans they had made.
In general, I favor the rule change, as I also favor the earlier mark-to-market rule relaxation - although each with important reservations and caveats. The well-known accounting expert Robert Willens commented in the Journal article:
The rule "includes securitization vehicles that played a large role in the bubble and allowed banks to operate with low levels of capital even though they had exposure to these assets that weren't on the balance sheet," says accounting analyst Robert Willens.
I partly agree and partly disagree with that characterization, which explains my cautious, caveated view of the rule requiring that SPEs be consolidated. I don't think, on what I've seen so far at least, that it was securitization as such (including asset securitization that goes beyond simply the basic concept of pooling loans and selling interests in the pool, to include the much more legally specific concept of securitization involving a sale by the originator of the loans into a SPE legally insulated from the originator) that was most important in leveraging up the financial services industry and financial markets. More important than the bottom level securitizations, so far as I can currently tell, were the credit derivatives built on top of the securitizations. I might turn out to be wrong about that, but it's my current sense of the leverage (see this post on the excellent Accrued Interest blog for a sense of just how dicey these could be).
In looking to prevent a re-run of the crisis, I think I would start (on this particular regulatory bit of things) at the top of the leverage chain and ratchet down from there, rather than starting with securitizations as such and working my way up. There would still be good reasons to require consolidation of SPEs back onto originator balance sheets in some circumstances, I'm sure, but I think I'd start in (this area of) regulatory reform with the most (over)-leveraged parts. But I'm very, very interested in hearing views on this, as I could be persuaded otherwise.