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Asset-Backed Securities: A Financial Structure Under Assault

Published by: TowerGroup

Published: Sep. 26, 2008 - 7 Pages


Table of Contents


TowerGroup Take-Aways

The demise of Lehman Brothers Holdings, Inc., and the restructuring of American International Group (AIG) have put severe downward pressure on stock markets; resulting capital shortages have hit banks hard.

TowerGroup expects the Financial Accounting Standards Board's (FASB's) September 2008 proposed amendments to have a huge impact on credit markets and that could cost banks over $60 billion (USD) in annual earnings.

TowerGroup believes anticipation of the FASB proposal was among the factors triggering the recent slide in financial stocks, including those for Freddie Mac and Fannie Mae, and the proposal may sound the death knell for the securitization market.

TowerGroup believes the FASB rule change could cause trillions of dollars in risky mortgages and consumer loans to return to the lenders' books and could require significant increases in loan loss reserves, in turn requiring billions in capital.

Regulators have the option to ease capital ratio requirements and reduce requirements on loan loss reserves to soften the blow of the expected large repatriation of balances, but TowerGroup believes that weakening of credit standards is unlikely.

Report Coverage

Introduction

Exhibit 1

The FASB Proposal: Threat to Securitization

The US Treasury's Alternate Proposals

New Players in the Lending Business

TowerGroup's Assessment of Credit Card Risk

Exhibit 2

Summary



Abstract

This TowerGroup ViewPoint focuses on the impact on credit cards of a 2008 proposal by the Financial Accounting Standards Board (FASB) for two accounting rules amendments governing asset securitizations: FAS 140 and FIN 46(R). It also assesses the possible effects on the credit industry of several recent regulatory proposals from the US Treasury Department and the Federal Reserve Bank.

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