(Alt title: Move over FASB 157 — FIN46-R is in town).
While investors of banks and brokers breathe a sigh of relief over the Citi-group rescue, another problem is on the horizon: Conduit financing.
From The Next Credit Scandal by Fortune’s Peter Eavis.
"The failure by banks to properly inform shareholders of their potential losses is perhaps the biggest scandal so far of the credit crunch that began this summer…The lack of disclosure not only has unsettled investors, but also has raised the prospect that large losses are lurking in other parts of the banks’ businesses.
One likely new trouble spot: Conduits, the opaque structures banks set up to provide debt funding to borrowers. Often, the debt issued by the conduits is collateralized with assets, like mortgages.
Conduits typically aren’t consolidated on a bank’s balance sheet. But banks are often on the hook to fund them if investors stop buying the debt they’ve issued. When that happens, a lot of risk can get moved onto the balance sheet.
Now, conduits could trigger a similar process at many big banks. Since demand for certain types of conduit debt has shrunk dramatically and bad loan numbers on subprime debt are soaring, banks could well end up absorbing large amounts of conduit debt."
Run-don’t-walk to read the full piece . . .
The Next Credit Scandal
Fortune, NOVEMBER 26 2007: 10:15 AM