The collapse of
gave a black eye to structured finance -- the sophisticated financing deals companies use to hedge their risk, avoid paying taxes or convert an illiquid investment into cold cash.
So after all the investigations, congressional hearings and shareholder lawsuits, where does structured finance stand? In some ways, it's as shady as ever. Yet in other important ways, the world of structured finance is very different post-Enron.
Many Wall Street firms remain gun-shy about even talking about the topic. Credit Suisse First Boston, which has one of the larger structured finance teams on Wall Street, declined to be interviewed. CSFB, a division of
Credit Suisse Group
, did many of Enron's structured finance deals. Other Wall Street firms were similarly mum.
Wall Street's reticence isn't too surprising given the fact that the
Securities and Exchange Commission
already has imposed an $80 million fine on
over some of its financial transactions with Enron. And the regulatory agency is still looking into a series of structured finance deals that
J.P. Morgan Chase
arranged for Enron.
"People are very nervous right now," said Robert Ross, president of the Structured Finance Institute, which offers courses and seminars to corporate executives. "The IRS is much more aggressive now. No one is willing to talk about it."
Yet behind the scenes, many on Wall Street and at U.S. businesses are grumbling about the impact of one of the biggest changes in the structured finance market -- a new accounting rule that forces companies to consolidate on their balance sheets any special-purpose entities that don't have enough outside investors.
A soon-to-be-published survey by Standard & Poor's found that an overwhelming majority of Wall Street bankers and corporate executives are concerned that the new accounting rule will make it more difficult for companies and banks to raise short-term financing in the asset-backed commercial paper market. A recent J.P. Morgan Chase research report says the asset-backed commercial paper market could decline by as much as 10% this year because of the new accounting rule.
The asset-backed commercial paper market is a big financing vehicle, with companies raising some $726 billion last year in this market. It now accounts for most of the commercial paper -- short-term debt notes -- that are issued by U.S. banks and corporations.
It's also a big market for U.S. banks, which help set up and administer the SPEs -- or conduits -- that companies use to sell commercial paper to investors. Citigroup, for instance, last year managed $49 billion worth of asset-backed commercial paper for its corporate clients.
It's called asset-backed commercial paper because the SPEs are funded by a wide array of sources ranging from credit-card receipts to auto loans to mortgages to corporate securities.
What the business community fears is the impact from a new rule adopted by the Financial Accounting Standards Board that requires a company to consolidate any SPE in which less than 10% of the capital invested in the venture comes from independent investors. The FASB is the nation's main accounting industry rulemaking body.
The full impact of Fin 46, as the rule is known, will start being felt this summer, when U.S. companies must either consolidate any SPEs that don't conform to the 10% requirement, or restructure them by getting outside investors to contribute additional capital.
The new rule was meant to address one of Enron's main structured finance abuses, which was using thinly capitalized SPEs to move ailing assets of Enron's balance sheet in order to make the company appear fiscally fit.
Finance experts say if many of the SPEs used to support the asset-backed commercial paper market have to be consolidated on company balance sheets, business may resist using them. Or if it takes a bigger outside investment to continue to keep these SPEs off the balance sheet, that means the banks that manage them could charge higher fees to corporate clients.
The end result, experts say, could be a higher cost of raising capital for some businesses. And in a weak economy, that could spell trouble down the road.
"The cost is likely to go up," said Pat Jordan, S&P's head of global asset-backed securities. "No one knows yet how much, but the costs will go up."
Still, in other ways, the structured finance world has not changed all that much post-Enron. For instance, a major law firm that did work for Enron is said to be shopping a new deal that's so innovative in reducing a corporation's tax burden that even the law firm acknowledges it's sure to merit an Internal Revenue Service audit. A tax lawyer that advises a number of power companies on structured finance deals, meanwhile, said he still sees instances in which company officials lean on their accountants to approve "screwy accounting interpretations."
To some extent, this isn't surprising. Structured finance is big business for some Wall Street firms. Fees from structured finance work, for instance, accounted for roughly 8% of New Jersey-based
$816 million in operating income last year.
Structured finance also has become an integral part of the way companies raise capital. The vast majority of structured finance deals are "securitizations," transactions in which a series of loans or leases are pooled together and used to back bonds that are then sold to institutional investors.
Indeed, in the first quarter of this year, $127 million worth of asset-backed securities deals were done, a 20% jump over the same time last year, Thomson Financial Securities Data reports -- even as Wall Street worries about the future of some structured finance deals.