It is not often that a regulator decides to back exceptions to rules in order
to prevent companies from being punished by the markets.
But that is exactly what US investors are currently worried about, after
Conrad Hewitt, chief accountant of the Securities and Exchange Commission,
condoned moves by US lenders that would allow the banks to keep problematic
sub-prime debt off their balance sheets.
Hewitt is supporting moves to offer an exemption on the FAS 140 accounting
What such an exemption will do is allow lenders to keep sub-prime mortgages
that are at risk of default off their balance sheets, making the lenders look
less leveraged than they are.
What has happened is that the lenders booked upfront profits by parcelling
off loans in bulk to off-balance sheet trusts known as qualified special purpose
entities (QSPEs). The QSPEs then grouped the loans into mortgage-backed
securities. The problem is that lenders, under pressure from politicians, have
been pushed to freeze mortgage interest rates that are due to rise, in order to
Under FAS 140 rules, any changes to loan terms mean the QSPEs lose their
off-balance sheet status and have to come onto the books. Lenders have obviously
been reluctant to bring the costs of freezing interest rates on loans into their
accounts, but Hewitt’s support for an exemption from doing this may save them
This isn’t the first time calls for exemptions have been made. As early as
August 2007 US senator Charlie Schumer lobbied the Big Four with a similar
request, as he cited the accounting rules as an obstacle to loan modifications.
Such moves have already been met with fierce resistance from the US
standard-setter the Financial
Accounting Standards Board.
‘In some respects, this industry has already received some exemptions from
accounting of Statement 140É I don’t have any sympathy for another exemption in
this circumstance,’ said FASB board member Tom Linsmeier.
As yet, there have been no similar calls for exemptions to accounting
standards in the UK. Paul Boyle, the chief executive of the Financial Reporting
Council, has said he would be unlikely to offer any.
‘If there are genuine economic risks that business would be exposed to, those
facts need to be reflected in the financial statements, even if the results are
somewhat unattractive,’ he said.
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