FASB mulls 'reputational risk' in securitizations

By Emily Chasan

NEW YORK, June 4 (Reuters) - Banks that sponsor asset backed securities may soon have to tell investors about the risks involved in deals they put together, even if the risks are only to their reputations, members of the Financial Accounting Standards Board said at a meeting on Wednesday.

In light of the recent credit crisis, the FASB, which sets U.S. accounting rules, has been debating how to improve disclosures around mortgage-backed securities, structured investment vehicles, and other passive investment tools that are designed to be legally isolated from the banks that create them.

Those assets have traditionally been kept off banks' books by using an accounting concept called the qualified special purpose entity, or QSPE. FASB however, has proposed removing the concept of a QSPE from the accounting literature, and on Wednesday debated how that could be achieved.

One of the key issues for FASB is when companies will tell investors about their exposure.

At the meeting on Wednesday, FASB member Thomas Linsmeier proposed that a sponsor of a securitization should always be assumed to have a significant variable interest in the deal.

"If an entity sponsors an SPE (special purpose entity), I think the original belief ought to be that they are getting some benefit out of the creation of the SPE," Linsmeier said.

"I think it would be better that users understand who that sponsor is and what their potential involvement is in all cases."

In the past, accounting rules have required such products to be placed on a sponsor's books if the sponsor could determine it bore the majority of the risks or rewards associated with the securitization.

But during the past year, banks have surprised investors by revealing that they faced bigger-than-expected risks from the off-balance sheet assets they created.

Last year, for example, Citigroup Inc (C.N) took $49 billion of structured investment vehicles onto its balance sheet, when few investors had been aware of their existence just six months before.

Even if the sponsor only has a fixed fee in a deal, some FASB members said they feel a sponsor faces other exposure, like an implicit guarantee to back the securitization or a risk to its reputation.

"If you're a sponsor, presumptively you've got reputational risk, so tell us about the deals you've done," FASB member Leslie Seidman said at the meeting.

FASB chairman Robert Herz said he wanted the final rule to have a "much stronger point about reputational risk."

The FASB's pending rule change on QSPE's could take effect as soon as next year. (Reporting by Emily Chasan, editing by Gerald E. McCormick)