Post-Enron, Structured Finance Addiction Hasn't Ebbed

Three years after Enron's off-balance-sheet shenanigans gave structured finance a black eye, the market for mind-numbingly complex financial deals with a habit of closing at the end of the quarter is sizzling.

This week, the parent companies of Standard & Poor's and Moody's Investors Service both reported higher second-quarter earnings and revenue, in large part due to their ratings work on structured-finance transactions.

S&P, which is owned by McGraw-HillMHP, reaped particular rewards from structured finance, part of the category of Wall Street instruments known as derivatives. In a tough market for bonds and new equity issuance, the ratings house saw revenue rise 14.8% from a year ago to $504.5 million, while operating profit shot up 24.9% to $214.2 million.

Among the fastest-growing areas of the structured finance market are asset-backed securities, sophisticated financing arrangements that companies and investors use to hedge risk, avoid paying taxes or convert an illiquid investment into cash. Asset-backed securities include a wide range of risk-shifting deals such as credit derivatives, credit default swaps and collateralized debt obligations. Generally, they involve the future cash flow of some asset being bought or sold at a discount in the present.

So far this year, Thomson Financial reports, the dollar value of asset-backed securities sold by U.S. companies is up 41% over the same time last year to $444 billion. The number of deals is up 35% to 878.

The strong growth in the structured finance market is good news for Wall Street firms such as CitigroupC, J.P. Morgan ChaseJPM and Lehman BrothersLEH, the main dealers in these complicated financings.

But the growing demand for structured finance is at odds with the public outcry that followed the collapse of Enron, a company that took the shady art of earnings management to an illegal apotheosis. Andy Fastow, Enron's former CFO, was a master at conjuring sham earnings from asset-backed transactions that could smooth out Enron's earnings and help the company meet Wall Street growth targets.