Thursday, February 28, 2008
latest acronym VIEs for WS notoriety
--The latest source of concern is variable interest entities (VIEs), another three-letter acronym that now holds toxic properties. This follows the failure of municipal auctions, known as auction rate securities (ARS) in recent weeks, while collateralised debt obligations and (CDOs) collateralised loan obligations (CLOs) continue to loom over the balance sheets of banks and investors. --VIE is an accounting term that covers a multitude of activities in almost any kind of special purpose vehicle – from conduits and structured investment vehicles (SIVs) to individual CDOs themselves. The term VIE refers to the way in which a bank’s economic exposure to a vehicle can change, which is key to whether it can be kept off-balance sheet. --Accounting for VIEs has been increasingly in the spotlight since US banks began to reveal more details about their exposure to various vehicles, such as the asset-backed commercial paper conduits used to fund investment in mortgage-backed bonds and other structured debt --For example, Citigroup shocked investors when it took $11bn writedowns, much of which was on $25bn of previously off-balance sheet exposures. --According to analysts at CreditSights, banks could still face $88bn in extra losses linked to writing down the value of their VIEs, excluding any provisions already in place against monoline exposures.