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50–413 2010

S. HRG. 110–1011 

TRANSPARENCY IN ACCOUNTING: PROPOSED 

CHANGES TO ACCOUNTING FOR OFF– 

BALANCE–SHEET ENTITIES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

HOW ASSETS HELD OFF OF THE BALANCE SHEET CONTRIBUTED TO 

THE SECURITIZATION OF RISKY ASSETS, SPECIFIC CHANGES THAT 

HAVE BEEN PROPOSED BY FASB TO CURB INAPPROPRIATE USES OF 

OFF-BALANCE SHEET ENTITIES, IMPLICATIONS FOR INVESTORS AND 

THE INDUSTRY OF DEFERRING THESE PROPOSED CHANGES, AND 

NECESSARY DISCLOSURES TO ENSURE THAT INVESTORS HAVE SUFFICIENT TRANSPARENCY TO MAKE INFORMED INVESTMENT DECISIONS 

THURSDAY, SEPTEMBER 18, 2008 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITIES AND INSURANCE AND INVESTMENT

JACK REED, Rhode Island, Chairman 

WAYNE ALLARD, Colorado, Ranking Member 

ROBERT MENENDEZ, New Jersey 

TIM JOHNSON, South Dakota 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT P. CASEY, Pennsylvania 

DANIEL K. AKAKA, Hawaii 

JON TESTER, Montana 

MICHAEL B. ENZI, Wyoming 

ROBERT F. BENNETT, Utah 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DIDEM NISANCI, Staff Director 

TEWANA WILKERSON, Republican Staff Director 


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(III) 

C O N T E N T S 

THURSDAY, SEPTEMBER 18, 2008 

Page 

Opening statement of Chairman Reed ................................................................... 1 

Opening statements, comments, or prepared statements of: 

Senator Allard ................................................................................................... 3 

WITNESSES 

Lawrence Smith, Board Member, Financial Accounting Standards Board 

(FASB) ................................................................................................................... 5 

Prepared statement .......................................................................................... 33 

John W. White, Director, Division of Corporation Finance, Securities and 

Exchange Commission, and James L. Kroeker, Deputy Chief Accountant, 

Securities and Exchange Commission ................................................................ 7 

Prepared statement .......................................................................................... 44 

Joseph R. Mason, Hermann Moyse Jr./Louisiana Bankers Association Professor of Finance, E.J. Ourso College of Business, Louisiana State University ......................................................................................................................... 17 

Prepared statement .......................................................................................... 53 

Donald Young, Managing Director, Young and Company LLC, and Former 

FASB Board Member ........................................................................................... 20 

Prepared statement .......................................................................................... 70 

Elizabeth F. Mooney, Analyst, Capital Strategy Research, The Capital Group 

Companies ............................................................................................................ 22 

Prepared statement .......................................................................................... 203 

George P. Miller, Executive Director, American Securitization Forum .............. 23 

Prepared statement .......................................................................................... 213 


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(1) 

TRANSPARENCY IN ACCOUNTING: PROPOSED 

CHANGES TO ACCOUNTING FOR OFF– 

BALANCE–SHEET ENTITIES 

THURSDAY, SEPTEMBER 18, 2008 

U.S. SENATE, 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, COMMITTEE ON BANKING, HOUSING, AND URBAN

AFFAIRS, 

Washington, DC. 

The Subcommittee met at 2:35 p.m., in room SD–538, Dirksen 

Senate Office Building, Senator Jack Reed, (Chairman of the Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN JACK REED 

Chairman REED. The Subcommittee will come to order. Senator 

Allard will be joining us in a moment. He is just moments away. 

I want to thank the witnesses, not only the first panel but the 

second panel. In the interest of time, I will go ahead and read my 

statement and then ask Senator Allard to make his statement, introduce the panel and ask for your statements. Thank you, gentlemen, for joining us today. 

At the outset, I want to acknowledge the importance of FASB’s 

independence, and I appreciate their appearance before our Committee to discuss the topic of off-balance-sheet accounting. This 

hearing is an opportunity to discuss some of the concerns with current standards and FASB’s recent proposals to address these problems. 

During the last 2 weeks, we have witnessed the most challenging 

financial crisis since the Great Depression. The aftershocks from 

these events continue and will be felt for many years. This prolonged crisis threatens not just individual firms, but the entire 

global financial system. Moreover, the impact will be felt by families, individuals, and businesses on Main Street as well as Wall 

Street. 

Given recent events, there is emerging consensus that companies 

that have more accurately accounted for their balance sheets remain viable, while those companies that were slower to recognize 

losses are punished by the marketplace. This is a clear signal for 

investors that there is a premium on improved transparency. Today’s topic is at the heart of transparency in our markets: properly 

acknowledging and understanding assets held off balance sheets. 

Over the last year or so, we have seen revelations of a significant 

build-up of off-balance-sheet exposures among some of the largest 


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financial institutions. These exposures not only weaken these institutions but, indeed, place significant risks on the entire financial 

system, contributing to the severity of the current crisis. 

This phenomenon of moving assets off the balance sheets is eerily familiar. We recall back in the days of Enron that its schemes 

to manufacture false profits included special purpose entities that 

conducted transactions off-balance sheet. The goal was to avoid financial reporting. While no one is necessarily suggesting scandals 

of the Enron kind, we cannot fail to admit the irony. We are dealing with a similar problem yet again, only 6 years later. 

Many experts, market participants, investors, and regulators 

have been calling for a change in this area. Reports and recommendations of the Financial Stability Forum, the President’s 

Working Group, and recently the private sector-led Counterparty 

Risk Management Policy Group III all similarly recommended a 

more rigorous accounting of off-balance-sheet vehicles in order to 

provide a more accurate view of a company’s exposures. 

The drivers of the subprime crisis were not only excess liquidity, 

leverage, complex products, and distorted incentives, but accounting rules that allowed mortgage-backed securities be held off the 

balance sheet. The securities packaged from these mortgages, many 

of them risky subprime mortgages, remain far from the view of investors and less closely reviewed by regulators. If we have learned 

anything from this recent mortgage mess—and I hope that we 

have—it is that we need more transparency in our markets, not 

less. Holding large amounts of assets off-balance sheet is not more 

transparency. If firms hold such risk, it should be disclosed so that 

investors can decide whether they are comfortable with such risk. 

Given the current state of the financial sector, this is the time to 

shore up confidence in our financial sector, not undermine. 

FASB has wrestled with accounting for securitization for over 

two decades. Most recently, FASB issued a rule in 2000 and then 

additional guidance after the Enron disaster to address accounting 

for securitizations and off-balance-sheet entities. In April of this 

year, FASB voted to remove a designation known as a ‘‘qualified 

special purpose entity,’’ or QSPE, which allows firms to move their 

mortgage-backed securities off the balance sheet. These changes 

were voted on in July and will now be effective in 2010. On Monday, FASB issued exposure drafts for review and comment. 

Now is the time to initiate these changes and to ensure that they 

provide thorough transparency so that risk may be properly assessed. With today’s hearing, we hope that we can, first, begin to 

evaluate whether the proposed changes result in sufficient transparency and bring appropriate market discipline to the process; 

and, second, understand whether or not there is sufficient enforcement of these rules to ensure they are implemented as written. 

Though the topic may be technical and complex, its implications 

are known. There is a real impact on investors, including many of 

us who hold pensions and other savings. It matters to anyone with 

mutual fund investments who want to know that their fund managers can review all possible information in making investment decisions with their money. And there is a real impact and consequence for financial regulators who ought to be fully aware of the 


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concentration of risk for the firms and, indeed, the health of the entire financial system and the economy. 

The ghost of Enron should be laid to rest finally. So let’s learn 

from our mistakes and move forward for a stronger financial sector 

and a stronger economy that investors at all levels can have confidence in. 

Now I would like to recognize the Ranking Member, my colleague 

Senator Allard, for his statement. 

OPENING STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Mr. Chairman, thank you for convening today’s 

hearing. I would like to welcome our panelists as we examine the 

updated FASB rules regarding accounting practices and off-balance-sheet entity disclosure, and I look forward to the opportunity 

to hear from our guests. 

Off-balance-sheet finance is an accounting technique in which a 

company’s debt obligation does not appear on the balance sheet as 

a liability. Keeping that off the balance sheet allows a company to 

appear more creditworthy but can misrepresent the firm’s financial 

structure to creditors, shareholders, and the public. 

It is critical that accounting methods for financial institutions 

yield an accurate and transparent representation. In the past, companies such as Enron have diminished our confidence in accounting 

methods by not being open and forthright. 

Other current economic concerns, including the mortgage crises, 

have been blamed in part on opaque and obtuse accounting methods. In light of today’s markets, it is of the utmost importance that 

accounting is regulated in a way that bolsters confidence by being 

precise, comprehensive, and open. 

Many people are asking how we reached this point. I think one 

of the reasons is that we do not know the full extent of risk institutions were involved in. Healthy risk can bring positive benefits to 

a company. However, investors and regulators must be given a full 

and total understanding of what risk is being undertaken. 

Accounting practices that do not accurately represent a company’s actual position are detrimental and have played a substantial role in creating financial turmoil. FASB has proposed changes 

to its accounting rules that could potentially alter the way banks, 

financial institutions, and other companies account for off-balancesheet assets. I am interested to see how these FASB regulations 

could change long-term accounting practices. These new rules force 

companies to be more careful, carefully consider which of their assets they have effectively control over, and could have an impact 

on how assets are accounted for. Bringing enhanced clarity to the 

marketplace has the potential to shore up confidence and promote 

stability. 

On another note, this is most likely the last hearing for the Securities Subcommittee, so I want to take a moment to express my 

deep appreciation to Chairman Jack Reed. He has been not only a 

colleague but also a friend to me during my time here in the Senate. We served on a number of committees together. I think this 

is our fourth or so that we have served on together through our 

term. While some of the people here today may not know it, I have 

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ferent Subcommittees: Securities, Insurance, and Investment; and 

Housing and Transportation on the Banking Committee; and Personnel and Strategic Forces on Armed Services. I have consistently 

found both him and his staff a pleasure to work with, no matter 

what the issue, and he brings a thoughtful, insightful perspective. 

In an increasingly partisan atmosphere, it has been refreshing to 

find someone who is willing to put politics aside and work together 

for productive, common-sense solutions to some of the problems facing our country. His willingness to work together has allowed us 

to make progress in important areas, such as preventing and ending homelessness and improving access to reverse mortgages for 

seniors. Whether in hearings or work on legislation, Senator Reed 

is a true gentleman, and I have always looked forward to the opportunity to work with him. His commitment to public service is 

commendable, and I wish him and his staff all the best. 

Again, thank you to our witnesses for being here today, and I 

look forward to your testimony. 

Chairman REED. Well, thank you, Senator Allard, not only for 

your statement but for those very, very kind words. And I must respond, it has similarly been a pleasure for me to work with you. 

And we have, both on the Armed Services Committee and the 

Banking Committee, seemed fated to be Chair, Ranking Member, 

and then switch to be Ranking Member and Chair. And it has been 

a pleasure, and your staff, as yourself, have been extraordinarily 

kind to work with, and I appreciate it very much. One might hope 

this is the last Subcommittee hearing of this Congress. [Laughter.] 

Chairman REED. But if we meet again, it will still be a pleasure, 

and I wish you the best as you embark on your different endeavors. 

But thank you very much, Wayne. 

Senator ALLARD. Thank you. I think we set an example perhaps 

for how we can work together in a bipartisan way. So thank you. 

Chairman REED. Thank you. 

Now let me introduce our panel. First, Mr. Lawrence Smith has 

served on the Board of the Financial Accounting Standards Board, 

FASB, since 2007 and has led the efforts to address off-balancesheet accounting issues at FASB. Thank you very much, Mr. 

Smith. 

John White is the Director of the Division of Corporation Finance 

at the Securities and Exchange Commission. Prior to his work at 

the SEC, he was a partner in the law firm of Cravath, Swaine & 

Moore. In his position there, among other responsibilities, he advised companies on corporate governance and public reporting responsibilities. 

James Kroeker is the Deputy Chief Accountant at the SEC, and 

prior to this position, he was at Deloitte as a partner in the National Accounting Services Group, where he provided consultation 

on accounting standards. 

We will begin with Mr. Smith, and I assume Mr. White will have 

a statement, and Mr. Kroeker will be available to respond to questions as well. 

Mr. Smith, please. 


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STATEMENT OF LAWRENCE SMITH, BOARD MEMBER, 

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 

Mr. SMITH. Chairman Reed and Ranking Member Allard, good 

afternoon. I am Larry Smith, a member of the Financial Accounting Standards Board. I am pleased to appear before you today on 

behalf of the FASB, and I thank you for inviting me to participate 

at this very important hearing. 

The FASB is an independent private sector organization. Our 

ability to conduct our work in a thorough and unbiased manner is 

fundamental to achieving our mission, which is to establish and 

improve general purpose standards of financial accounting and reporting for both public and private enterprises. 

As significant reporting issues arise, the Board endeavors to understand those issues and to identify the reasons why they arose. 

The events that have occurred recently in the credit markets created such a review, and the Board accelerated its work in several 

specific areas. 

While we have been working on a number of different projects 

to address the reporting issues we identified, it is important to understand and acknowledge that good financial reporting requires 

both sound standards as well as faithful application of those standards. 

For example, the two standards that are the focus of my testimony—Statement 140, which address the sale of receivables, as 

well as other financial instruments; and Interpretation 46(R), 

which addresses the consolidation of variable interest entities, 

which includes most securitization vehicles—both include disclosure requirements regarding the extent of involvement with an entity holding receivables. 

Also, in 2005, the Board issued guidance in response to the proliferation of loans with non-traditional characteristics to reinforce 

the extensive accounting and disclosure requirements that are applicable to such products. Yet users have noted that such disclosures were often missing from financial statements. 

The two fundamental issues identified as problematic in Statement 140 and Interpretation 46(R) are the concepts of QSPEs, 

which were meant to be pass-through entities that have minimal 

decisionmaking authority and were, therefore, exempt from consolidation, and reliance on a mathematical calculation to assess whether a holder of an interest in an SPE should consolidate that entity. 

On Monday, the Board issued three interrelated exposure drafts 

that address these issues. Specifically, the Board is exposing for 

comment: one, that we eliminate the concept of the QSPE from our 

literature such that all entities will be subject to our consolidation 

principles; two, that we first require a qualitative assessment of 

control be performed to determine whether an interest holder 

should consolidate an entity in which it holds an interest; and, 

three, improvements in disclosures to better enable users to assess 

the extent to which an entity is involved with another entity, the 

related potential risks related to that involvement, the degree to 

which consolidated assets are restricted, as well as the judgments 

and assumptions made in determining whether an entity should be 

consolidated. 


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You might ask, If we are eliminating QSPEs now, why did the 

FASB create them in the first place? The Board at the time created 

the concept to allow securitization transactions to be reported as 

sales of receivables because the QSPE’s activities were supposed to 

be significantly limited and entirely specified. In other words, they 

were supposed to be simple pass-through entities. However, practices have evolved significantly such that the qualifying criteria 

have been stretched well beyond the original intent and requirements of Statement 140. The Board no longer believes the concept 

of a QSPE is workable since practice has shown that there are few 

assets capable of being managed when the activities of the manager of those assets are significantly limited and entirely specified. 

You might also ask, If the FASB believes that a qualification assessment of control is better than the mathematical calculation currently required, why didn’t the FASB require that in the first 

place? 

When 46(R) was written the Board thought the mathematical 

calculation of expected losses would be a good indicator of who ultimately controls the entity. However, we have seen in practice that 

people have engineered around the math to avoid consolidation. 

Some people have also questioned whether some of the probability 

assessments made in connection with estimating expected losses 

truly reflected the risks of those interests. Blind exuberance may 

have contributed to overlooking some of the risks faced by those involved with these entities, such as some risks like liquidity risk 

and reputation risk which were virtually ignored. We believe it will 

be more difficult to ignore these risks through a qualitative assessment. 

The Board is proposing that both the elimination of QSPEs from 

Statement 140 and the requirement to first use a qualitative assessment of control under Interpretation 46(R) be effective for fiscal 

years beginning after November 15, 2009. The Board would have 

liked to have eliminated the QSPE concept and required the qualitative assessment earlier. However, discussions with banking regulators and preparers lead us to conclude that the consequential 

consideration of regulatory capital requirements and other changes 

are impossible to address any earlier. However, we have not delayed the improvements in financial statement disclosures. The exposure draft proposes that these disclosure improvements be required for financial periods ending after the guidance is finalized, 

which we expect to be late this year. We believe that the required 

financial statement disclosures will enable investors to understand 

a transferor’s continuing involvement in the financial assets that 

have been transferred to an SPE, the nature of any restrictions on 

those assets that continue to be reported by an entity in its balance 

sheet, the judgments and assumptions made by the enterprise in 

determining whether it must consolidate the variable interest entity, the involvement of an entity with a variable interest entity, and 

the nature of and changes in the risks associated with an entity’s 

involvement with a VIE. 

The FASB shares your Subcommittee’s concerns about the role 

off-balance-sheet entities have played in the current financial crisis, and we are working hard to address the shortcomings in finanVerDate Nov 24 2008 02:26 Apr 02, 2010 Jkt 050413 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 E:\HR\OC\A413.XXX A413

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cial reporting. We encourage all interested parties to provide us 

comments on the three exposure drafts we issued earlier this week. 

In closing, I again want to emphasize that good financial reporting requires both sound standards as well as faithful application of 

those standards. 

Thank you again, Mr. Chairman, Ranking Member Allard. I very 

much appreciate your continuing interest in and support of the 

mission and the activities of the FASB. 

Chairman REED. Thank you, Mr. Smith. 

Mr. White. 

STATEMENT OF JOHN W. WHITE, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION, AND JAMES L. KROEKER, DEPUTY CHIEF ACCOUNTANT, SECURITIES AND EXCHANGE COMMISSION 

Mr. WHITE. Good afternoon. I would like to thank you, Chairman 

Reed and Ranking Member Allard, for the opportunity to testify 

today, along with Jim Kroeker, on behalf of the Securities and Exchange Commission. 

I am going to start off by discussing transparency and disclosure 

of off-balance-sheet arrangements, and then I am actually going to 

ask Jim to complete our opening remarks with a discussion of our 

work with the FASB, if that would be OK. 

Chairman REED. Fine. 

Mr. WHITE. We also have submitted a written statement for the 

record. 

Starting with transparency, transparency is the bedrock of good 

disclosure, and it allows investors to make informed decisions. 

Clear and understandable information about a company and the 

risk that it faces reduces uncertainty in the market. And, of course, 

capital markets are constantly changing, and as markets change, 

risks change; financial products change; and so a company’s disclosure needs to change as well. 

In response to the Sarbanes-Oxley Act, the Commission in 2003 

adopted a significant set of changes in the way that companies disclose information about off-balance-sheet arrangements. And as a 

result of those disclosure rules, today financial institutions must 

disclose extensive information about off-balance-sheet arrangements if—and I underline the ‘‘if ’’—the arrangements are reasonably likely to have a current or future material effect on the company’s financial condition, revenues, expenses, or liquidity. 

At the Commission, since the adoption of those requirements in 

2003, we have continued to focus on enhancing transparency, and 

in recent months alone, we have taken a number of actions aimed 

at improving the disclosure requirements that came out in 2003, 

including last December issuing a letter to the CFOs of over 25 

large financial institutions about making additional off-balancesheet disclosures; in January of this year issuing a letter providing 

additional guidance on the application of FAS 140; in March 

issuing another letter about additional fair value disclosures; in 

July we had a roundtable on fair value; in August we had a roundtable on market turmoil; and just this week we issued another letter to over 25 financial institutions covering additional transparent 

disclosure of fair value calculations. 


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In addition to those activities, we continue to have our regular 

ongoing work of reviewing the financial statements of every public 

company, including all public financial institutions, at least once 

every 3 years. So I think it is fair to say that we have a fair 

amount of activity in this area at the Commission, both at the 

Commission level and the staff level. 

So that is what is happening on the disclosure front. I am going 

to turn it over to Jim to talk about what is happened in our role 

with the FASB. 

Mr. KROEKER. I would also like to thank you, Chairman Reed 

and Ranking Member Allard, for the opportunity to testify today. 

The continued review of the effectiveness of existing accounting 

standards for off-balance-sheet arrangements and the recent capital market pressures have highlighted the need for improvement 

in the existing accounting guidance for off-balance-sheet arrangements. 

As you are aware, the FASB issued FIN 46(R) to improve the accounting for off-balance-sheet arrangements after the Enron fallout. However, FIN 46(R) provided a scope exception for certain passive trusts, such as those commonly used in bank securitization 

transactions. 

To address the current issues related to off-balance-sheet accounting, in January 2008, the Commission staff asked the FASB 

to consider the need for improvements to the accounting guidance 

and the disclosures for such transactions, including securitizations. 

Based on the potential far-reaching impact of this accounting topic 

and the important due process procedures required to evaluate and 

implement the potential changes, the speed at which the FASB has 

moved this project forward is commendable. 

In November 2008, after a 60-day comment period, we expect the 

FASB to host a public roundtable on their proposed amendments. 

If the FASB adopts the proposed rule and the changes described 

earlier by Larry, we expect that the SPE sponsors of such off-balance-sheet arrangements would consolidate some larger portion of 

existing off-balance-sheet transactions, including some portion of 

existing QSPEs, SIVs, and commercial paper conduits. 

We believe that the proposed amendments hold promise in enhancing the transparency around the financial reporting for off-balance-sheet transactions, and we continue to monitor the effectiveness of any changes and mandate further changes if necessary. 

As John mentioned earlier, the Division of Corporation Finance 

reviews the financial statements of every public company, including 

financial institutions, at least once every 3 years. This effort is 

aimed at enhancing disclosure and at improving compliance with 

Federal securities laws. 

In addition to this work, another important aspect of our involvement in accounting standards is the rigorous enforcement of Federal securities laws. The Commission regularly investigates allegations of accounting irregularities and reporting violations, including 

those related to off-balance-sheet accounting. Just to highlight a recent example, the Commission has brought action involving allegations of improper accounting for mortgage securitizations by three 

NYSE-listed Puerto Rican financial institutions. Additional examples of enforcement in this area are included in our written testiVerDate Nov 24 2008 02:26 Apr 02, 2010 Jkt 050413 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\A413.XXX A413

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mony. The Division of Enforcement will pursue allegations such as 

these whenever warranted. 

We look forward to evaluating the FASB’s exposure draft and the 

related comment letters that they received, and, again, I want to 

thank you for holding this hearing, and we would be happy to address any questions that you might have. 

Chairman REED. Well, thank you very much, gentlemen, for your 

testimony. 

Mr. Smith, you indicated in your testimony that there are shortcomings with the current rule, and that has prompted the reevaluation by FASB. Could you highlight in more detail some of the 

shortcomings with the current rule that you are trying to address 

with this new rulemaking? 

Mr. SMITH. Sure. First I will talk about 140. 140 has a concept 

called ‘‘qualified special purpose entities,’’ QSPEs, and basically, as 

the Board has discussed this over some time, the Board believed 

that QSPEs should be brain-dead or pass-through entities. So, effectively, the person that is servicing the loans that are held by a 

QSPE should not have any significant decisionmaking authority 

over them. 

Over time, as things change, et cetera, more and more different 

types of assets or different types of receivables have been put into 

QSPEs, such that the application and practice has been that 

QSPEs are holding probably, you know, different types of assets 

than the Board originally envisioned. 

We went back and tried to—when we were dealing with this 

issue—and we have been dealing with this issue for a number of 

years. We tried to figure out ways to put parameters around the 

operations of the QSPE in terms of defining the types of assets that 

could go in, the types of activities or decisions that can be made. 

But, ultimately, after careful consideration of existing structures, 

et cetera, we decided that that was impossible and felt that because the QSPE is an exception to current accounting rule, we 

should just eliminate that conception and fall back on the principle 

regarding whether an entity holding those receivables should be 

consolidated. 

Now, in terms of the application of 46(R), which is the other one 

that I mentioned, 46(R) was in direct response to Enron, and the 

mathematical calculation that was put into place to determine 

whether an entity should consolidate an entity was based upon the 

expectation that the holder of an interest that has the most expected losses, that would absorb the most expected losses or reap 

the most benefits would be effectively the entity that controlled 

that special purpose entity. 

Well, as time has gone on, people have engineered around that 

concept. There have been various mechanisms put in place. Just 

one example is an expected loss tranche, which is a way of getting 

a group of investors that hold a fairly minor position in the special 

purpose entity to absorb those losses, yet they have no other rights 

associated with it. If those expected losses occurred, they would 

lose their investment period, and that is all they could do. But yet, 

because of the application of the math, they were deemed to be the 

primary beneficiary, yet there were other people or holders of interests who had much greater potential risks. 


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We also think that contributing to this was, you know, the overly 

optimistic assessments of probabilities of expected losses. So the 

Board decided that we should first consider some qualitative aspects of control, you know, whether from a practical standpoint the 

combination of different interests effectively put another—a holder 

of those interests in control rather than rely on the math, hoping, 

truly hoping that people cannot structure around it the way they 

can the math. 

So that is what we have done. You know, we have put it out for 

comment, and we will see what people say. 

Chairman REED. I understand the proposal has as a default position the quantitative measure, that if the qualitative approach does 

not work, what is to prevent someone from doing sort of a paper 

drill, you know, a qualitative analysis to satisfy Mr. White and Mr. 

Kroeker and their colleagues and then essentially just say, well, 

here is the number, and—— 

Mr. SMITH. We will fall back on—— 

Chairman REED [continuing]. We got this, this is under the rule? 

We are right back where we started from? 

Mr. SMITH. I will comment on that in two respects. First of all, 

we put the fallback position in the exposure draft and put it out 

for exposure and people to comment on. Whether we continue to 

rely on that fallback position remains to be seen. A number of us 

were uncomfortable with just removing the math to start out with. 

We have also put in the standard—I think it is nine different examples of fairly common structures that you will see out there, and 

put at least our assessment of whether in those situations someone 

should consolidate. So we have given some illustrative guidance to 

people in terms of how to apply this in the future, which we hope 

will overcome that. 

The staff at the FASB does not think there will be any situations 

where people fall back on the math. 

Chairman REED. I understand ISB does not use the quantitative 

approach. They use the qualitative approach. Is that accurate? 

Mr. SMITH. That is true. Currently, they have a standard that requires a qualitative assessment. It is not the same as ours, but it 

has similarities to ours. And at the same time, they are also taking 

a more fundamental look at their consolidation model in general, 

which, in fact, was the subject of—at least a staff draft was the 

subject of a roundtable over in London just 2 days ago. 

Chairman REED. What I think would make sense is let me finish 

my questions of Mr. Smith and then ask Senator Allard for questions, and then we will do a second round, and I will have some 

questions for Mr. White and Mr. Kroeker. 

The purpose of some of the expansion, or whatever the right 

term is, the use of the rules or the misuse of the rules, to avoid 

regulatory oversight, to not diminish capital on, you know, the 

overall institution. What do you feel is driving the creative use, if 

you will, in retrospect of these rules? 

Mr. SMITH. I think it is a combination of factors. I think economic times informs people’s behavior. I think the complexity of 

securitization transactions are tremendous. It is not—at least what 

I have been told, it is not unusual for a particular securitization 

transaction to have a stack of legal papers perhaps this high. So 


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there might be, you know, some overlooking of certain requirements that are embedded in some of those legal documents. 

I also believe that, you know, people looked at certain aspects of 

what was permitted before and then evaluated something fairly 

similar, but let’s say just a little bit over the line, and said, ‘‘Well, 

that must be OK because it is only a little bit over the line.’’ And 

over time, these practices just stretch. 

A lot of people thought that securitization transactions through 

QSPEs were permitted, and we had some guidance in terms of how 

to apply that. And they looked to those and then made their own 

interpretations themselves. But I think over time it is just that, 

you know, things stretch. And that is what happens when you 

have—when you basically have exceptions to accounting principles. 

You know, we have been criticized for being overly rules based in 

this country and that exceptions have really effectively created a 

lot of those rules. And now we are going back, and we are trying 

to eliminate them. 

Chairman REED. Thank you, Mr. Smith. 

Senator Allard, and then we will do a second round. 

Senator ALLARD. If we were to apply the more stringent and different off-balance-sheet entity regulations and they were active several years ago, would the mortgage crisis be worse today, or better? 

Or where would we stand? 

Mr. SMITH. I do not know the answer to that question. I mean, 

it would be conjecture on my part as to try to say what would have 

happened in terms of the extent to which people, you know, would 

have entered into these transactions had other rules been in place. 

I really do not know the answer to that question. 

Senator ALLARD. So when we come to the case of securitized 

mortgages, then you would not have an automatic pass-through 

then. I would assume they are sort of considered special purpose 

entities. 

Mr. SMITH. Right. 

Senator ALLARD. And so then they would not be just a passthrough group. They would have—well, you do not even have them 

now. But you have some mechanism now where they would be recalculated or reassessed as far as risk. Is that right? 

Mr. SMITH. Yes. If we remove the QSPE status, there will still 

be a vehicle that hold these mortgages, and what will happen is 

there will be an evaluation of the roles and responsibilities of the 

different parties who hold interest in these transactions to assess 

who ultimately controls the entity. And it is usually a combination 

of the ability to prescribe what types of assets go into the entity 

to begin with, combined with the ability to service those assets, and 

perhaps combine with some type of a liquidity guarantee or credit 

guarantee or something like that. 

Senator ALLARD. Now, just recently, Fannie Mae and Freddie 

Mac have been basically taken over by the Government. Do these 

accounting rules apply now to a Government agency in this particular instance? 

Mr. SMITH. Well, if they continue to put out financial statements 

in accordance with generally accepted accounting principles in the 

U.S., yes, they will be subject—— 

Senator ALLARD. And they have done that in the past? 


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Mr. SMITH. Have they? 

Senator ALLARD. Done that in the past? 

Mr. SMITH. Yes. 

Senator ALLARD. And so we would expect that they would continue to do that, even though they are taken over by the Government at this point in time. 

Mr. SMITH. I do not know specifically, but I believe—I would not 

be surprised if they continued to do that. 

Senator ALLARD. Now, as I understand it, Fannie Mae and 

Freddie Mac, when they securitized their mortgages, they ended up 

buying their own securitized mortgages off of the market. How 

would these new accounting provisions treat something like that? 

Mr. SMITH. Well, first you would evaluate the new accounting 

rules pertaining to the vehicle that was set up to hold the mortgages that they guarantee. You would then assess whether Fannie 

or Freddie effectively control that entity. And I will just give you 

my personal opinion. Not going through any legal documents or 

what have you, but based upon my understanding of the combination of risks, et cetera, it appears that Fannie and Freddie would 

be the consolidator of those entities, and then in terms of them 

buying their own interest, effectively it is an intra-company transaction. 

Senator ALLARD. And so go in as an added risk? 

Mr. SMITH. Well, no. It is just that it would be——they would be 

dealing with themselves, if you will. 

Senator ALLARD. And so what practical effect does that have on 

their financial stability? 

Mr. SMITH. You know, the accounting for this really does not, I 

do not think, enter into their financial or end stability. It will 

change the way their financial statements look dramatically. 

Senator ALLARD. Well, then, let me put it this way: Will their financial statements reflect that increased risk? 

Mr. SMITH. Yes. The assets and liabilities would be on their 

books. 

Senator ALLARD. I see. Okay. So then there would be more transparency, for example, on Fannie Mae and Freddie Mac under these 

new accounting provisions. 

Mr. SMITH. That would be my expectation. 

Senator ALLARD. Okay. Now, you plan on putting these into effect in the beginning of 2009. Is that correct? 

Mr. SMITH. No. Let me explain. 

Senator ALLARD. Okay. 

Mr. SMITH. The changes regarding the elimination of QSPEs and 

the change in how you would assess control under FIN 46(R) would 

be applicable to 2010 calendar year companies. 

Senator ALLARD. Starting on January 1. 

Mr. SMITH. Yes. The disclosures, the enhanced disclosures, would 

be in effect for the reporting period ending after we release them. 

So if we release the final disclosure standard December 15th, they 

would be applicable to December 31st year-end companies. 

Senator ALLARD. Okay. And are we going to have adequate time 

for comment between now and when we start requiring them to do 

these evaluations? 


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Mr. SMITH. We have put in a 30-day comment period for the disclosures and a 60-day comment period for the 46(R) and 140. We 

believe that that—we know that people are watching us. We know 

that interested parties have been following our projects, and we expect that they are geared up to respond to our proposals. 

Senator ALLARD. Is this the same time period that you have allowed on previous proposals? 

Mr. SMITH. It varies from proposal to proposal. 

Senator ALLARD. And so the time period you came up with here, 

was that just some assumptions that you made? I mean, how do 

you decide which ones you take a longer time period for comment 

and which ones do you take a shorter time period for comment? Because I suspect there will be a fair amount of comment on this as 

it applies from consumer groups as well as accountants and everybody else that has an interest in it, companies probably themselves. 

Mr. SMITH. I expect you are right there. In terms of the disclosures, we did consider the timing of the application, and we are 

hoping to get these disclosures in place by the end of the year. So, 

yes, the comment period is a function of when we wanted these increased disclosures applied. 

In terms of the time period for the other two, we felt that this 

was adequate time for people to respond and for us to release the 

final standard probably by the beginning of next year, or some time 

in the first quarter. 

Senator ALLARD. Now, is it your view that if we had applied 

these principles that you have now before the mortgage-backed securities had proliferated to the point they are now that we would 

not be dealing with a mortgage crisis, at least to the degree that 

we are now? 

Mr. SMITH. I really—again, I do not know the answer to that 

question. You know, back in 2005, the Board became aware of the 

significant proliferation of non-traditional loans, so these are loans 

where there were no payments or, you know, no significant payments required, you know, negatively amortizing loans, et cetera, 

and the fact that you did not need any kind of documentation to 

secure a loan or regarding either your wanting to live—whether 

you were indicating you were going to live in the house or what 

your income was. And as a result of that, we put out a standard 

to try to convey to the world that there are existing accounting requirements that call for disclosures and how to account for these 

types of transactions as well as the risks that are created by those 

types of transactions. And we did not see any significant changes 

in the disclosures as a result of that. 

But I cannot really tell you how the market would have reacted 

had we put these rules in place earlier. 

Senator ALLARD. Yes. Well, Mr. Chairman, you said you have 

more questions, so I will hold the rest of mine for the next round. 

Thank you. 

Chairman REED. Thank you, Senator Allard. 

Mr. White and Mr. Kroeker, I have communicated with the SEC 

and FASB regarding these issues in letters, and you have responded back. This goes to the issue of the overall regulatory regime, which rules, principles, together with interpretations—you 


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indicated that several interpretations have been given by SEC— 

and then enforcement. 

In a letter that FASB sent back to me, they indicated that they 

had knowledge of some entities that were not following the accounting standards with respect to these off-balance-sheet entities. 

Have you had a conscious, concerted effort to follow up and to see 

that these rules were being adequately embraced or applied? 

Mr. WHITE. The answer is yes. 

Chairman REED. And can you elaborate? 

Mr. WHITE. Much of our efforts have been devoted on the disclosure side, and I think I described a fair amount of that earlier. In 

addition looking at whether companies are disclosing in accordance 

with our rules, we have also looked to see whether companies are 

complying with the accounting rules as they exist today. And I 

would say, by and large, we have found that companies have been 

complying with the existing accounting rules. 

Chairman REED. Will you be reviewing these rules that are being 

proposed to ensure that they capture what should be captured in 

terms of off-balance-sheet entities and that are brought back on 

properly? Is that something you can positively be engaged in? 

Mr. WHITE. Jim, maybe you should respond. 

Mr. KROEKER. Absolutely. Part of our ongoing process and our 

oversight of FASB and their role in the standard-setting environment, we certainly will be following these rules. We will be particularly interested in comments that they receive from investors about 

the improved transparency that we believe these rules have the 

promise to provide. So in addition following and commenting directly with the FASB our thoughts on the proposed enhancements, 

including issues that Larry addressed in terms of the concept that 

you might have an entity that is very limited in its power, yet 

somebody has got to be there to service assets and liabilities, and, 

therefore, it stretches what people think ought to exist in terms of 

the notion of control, we will be looking right at that aspect in this 

proposal. 

Chairman REED. In my discussions with Mr. Smith, he noted, we 

both noted, that the international accounting rules have a qualitative approach to this recognition, and that is the approach, the 

direction that the new rules seem to go in. 

Some commentators, I think Ms. Mooney in particular, have indicated that under the IASB rules, there is a significant amount of 

SIVs that could stay off the balance sheet. And this becomes particularly critical as the Securities and Exchange Commission is proposing that companies, big companies, are able to elect one or the 

other. 

First, this would seem to be the ideal opportunity to work collaboratively together for one rule which both the international 

standards and the FASB standards converged. 

Second, would this allow an opportunity with the proposed sort 

of choice of accounting regimes to essentially defeat what FASB is 

trying to do by allowing a reporting company to use an international standard and keep these entities off their balance sheet? 

Mr. WHITE. Maybe I will start it and then switch it over to Jim. 

Chairman REED. Sure. 


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Mr. WHITE. The proposal with respect to IFRS that you are referring to, if adopted—it is a proposal at this point—but, if adopted, 

would allow a limited number of U.S. companies to elect to use 

IFRS if IFRS was the predominant accounting system used in their 

industry internationally. So at least those companies would be able 

to choose, if you want to use that word, between using IFRS and 

using U.S. GAAP. 

But, Jim, maybe you want to describe the differences between 

the two. 

Mr. KROEKER. Yes. It relates to the idea and the opportunity to 

use what we are seeing today to foster convergence. I could not 

agree more. I think it is a wonderful opportunity to move toward 

a higher quality standard for off-balance-sheet accounting. 

We are also, though, interested in ensuring that the FASB moves 

quickly to improve off-balance-sheet accounting in the U.S. And so 

to the extent that a convergence project would take longer than 

simply addressing the more immediate issue of application of accounting standards in the U.S., we have been supportive of the 

FASB’s project to move quickly on improving off-balance-sheet accounting. 

The IASB likewise has a project on their agenda to improve offbalance-sheet accounting, and as Larry mentioned, the FASB and 

the IASB are working very closely on that. 

Chairman REED. But it seems to me there still is at this juncture 

the distinct possibility that there could be two different rules about 

qualitative recognition, that a company could, in terms of regulatory arbitrage, choose the one that allows them to keep these entities off their balance sheets, which would go against the very essence of this hearing, getting most of these entities that should be 

recognized on the balance sheets. And I think that adds a further 

complexity to this notion of selecting either the international regime or the FASB regime. 

That is a comment, but if you would like to respond. 

Mr. WHITE. I might mention that at the roundtable we had this 

summer that I referred to earlier, one company that was there said 

that when they switched to IFRS, they actually brought 200 of 

their subsidiaries on balance sheet in the process of moving to 

IFRS. So I am not sure there is a particular assumption about how 

consolidation would work. 

Chairman REED. I would presume—and this is a presumption— 

that that issue of whether this effectuates the same thing that 

FASB is trying to do, maybe not in exactly the same way is it accomplished, would be at least a factor that you would try to examine. Is that fair? Thanks. 

We have talked about these, you know, special investment vehicles, the QSPEs, but there is a whole other group of entities out 

there—credit derivatives—that are in some cases off the balance 

sheet, but we are seeing have a significant impact on the operations of a company. One could speculate that the reason that AIG 

is now a subsidiary of the Federal Reserve is because their involvement in the credit derivatives market is so significant. And yet do 

you think that was properly reflected on their balance sheets, Mr. 

White? 


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Mr. WHITE. I guess I would not think that we should be discussing individual registrants that we review. That is not our common practice. AIG is one of the companies—— 

Chairman REED. Well, in general terms then, do you feel that in 

addition to these vehicles that are created, there are other classes 

of investment securities or financial transactions that could have a 

material impact on the company, but are not effectively disclosed 

under current rules? 

Mr. WHITE. I would not have thought that we thought there were 

gaps in the disclosure requirements in our current rules. 

Mr. KROEKER. As it relates to the accounting particularly for 

highly complex things like credit default swaps, the FASB put in 

place in the late 1990s, early 2000s, guidance on accounting for derivative transactions, and many of those types of instruments are, 

in fact, derivatives. And so in terms of bringing them on balance 

sheet and reflecting the exposure, that has happened, although the 

FASB recently issued—and Mr. Smith might have some additional 

background on some enhanced disclosures about credit default and 

structured, highly structured insurance-type products. 

Chairman REED. Can you comment, Mr. Smith? 

Mr. SMITH. Yes. In September, this month, we issued a final requirement to improve the disclosures surrounding credit derivatives. What happened was we had a project to address the accounting for financial guarantee industry, and in connection with that, 

we proposed a number of disclosures surrounding the risks that an 

entity takes on in issuing those guarantees—or that guarantee insurance. And we noted very—some similarities between those guarantees and the nature of credit derivatives. 

So we basically embarked on another project to address the disclosures and credit derivatives, which, as I just said, were issued 

earlier this month. 

Chairman REED. Thank you. Senator Allard had to step out to 

take a call, but that allows me, for the record, to ask Mr. White 

and Mr. Kroeker a question that Senator Allard asked about the 

timeliness of the rules, the ability to have the comments, and the 

implementation. Do you think there is adequate time for the comment period and also an adequate time for reporting companies to 

adjust to the new rules? 

Mr. WHITE. The 60-day comment period is the comment period 

that we normally use on our rulemaking at the SEC. So certainly 

my experience over the last few years has been that 60 days produces a flood of public comments and provides adequate time. 

If I understand it, the disclosure rules where you are thinking 

of 30 days, those are probably less complex and easier to understand, and—— 

Mr. SMITH. Yes. 

Mr. WHITE. Probably that is part of the reasons why you went 

to 30 days. The rest is so you could get them into effect earlier. 

Mr. SMITH. Correct. 

Chairman REED. Just a final question, and, again, Mr. Smith, 

you might—I just want to make sure I understand. The disclosure 

requirements would become effective very shortly after the rules 

are finalized. 

Mr. SMITH. That is correct. 


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Chairman REED. Which would require, I think, or which could require immediate disclosure of significant off-balance-sheet assets or 

liabilities, but they would not necessarily have to be brought on to 

the balance sheet. Is that a fair way to—— 

Mr. SMITH. That is correct. 

Chairman REED. I know that we are all arguing for disclosure, 

but the disclosure itself would cause, I think, evaluation or reevaluation of the reporting companies. That is fair to say, correct? 

Mr. SMITH. Yes. The purpose of the disclosures is to enhance the 

user’s ability to assess the risk that a company holds, regardless 

of whether those assets are presented on the balance sheet or not. 

Chairman REED. Senator Allard has other questions, I am sure. 

So do I. We will keep the record open for several days, and if you 

would be prepared to respond in writing to our written questions, 

I would appreciate it, and other members of the panel. But thank 

you very much, gentlemen, for your testimony, and I will call up 

the second panel. 

Well, I want to welcome the second panel, and thank you all for 

joining us today. Let me introduce the panel; then I will ask you 

to make your statements and try to stay within the 5-minute 

guidelines. Your statements will be made part of the record automatically. And, indeed, if you want to comment about what you 

have heard, that is also appropriate. 

First we have Joseph Mason. Mr. Mason holds the Hermann 

Moyse Jr. Endowed Chair of Banking at the E.J. Ourso College of 

Business, Louisiana State University. He has written extensively 

on the role of securitizations in the mortgage problems the country 

currently faces. Earlier in his career, he worked at the OCC and 

studied the role of securitizations in banking. Thank you, Professor 

Mason. 

Elizabeth Mooney is an analyst for the Capital Strategy Research 

of the Capital Group covering global accounting issues. She is a 

certified public accountant and a member of the FASB Investor 

Task Force and Investors Technical Advisory Committee and the 

International Accounting Standards Board, and served a term on 

the FASB Advisory Council. Thank you. 

George Miller is the Executive Director of the American 

Securitization Forum, an association that represents various participants in the securitization industry. Previously, Mr. Miller was 

an attorney at Sidley Austin where he specialized in structured financial transactions. 

Donald Young recently completed a term as a Board member of 

FASB. He is current the Managing Director of Young and Company 

where he provides consulting and research services for technology 

and private equity clients. 

Thank you all very much for joining us. Professor Mason. Turn 

on the microphone, please. 

STATEMENT OF JOSEPH R. MASON, HERMANN MOYSE JR./LOUISIANA BANKERS ASSOCIATION PROFESSOR OF FINANCE, 

E.J. OURSO COLLEGE OF BUSINESS, LOUISIANA STATE UNIVERSITY 

Mr. MASON. Thank you, Chairman Reed, Ranking Member Allard, Members of the Committee, for the opportunity to testify 


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today. Chairman Reed, as you pointed out earlier, this week’s financial crisis was largely due to the lack of transparency about investment exposures, which has been promulgated by ineffective accounting rules and inefficient bond ratings. 

Back in 1997, Moody’s Investors Successful wrote, and I quote, 

‘‘The simple act of securitizing assets can affect the appearance of 

the income statement and balance sheet in a profound manner 

without, in many cases, significantly altering the underlying economics of the seller. With securitization, reported earnings are 

overstated and reported balance sheet leverage is understated 

while there may be little, if any, risk transference.’’ 

As early as 1987, Moody’s pointed out that while, and I quote, 

‘‘the practices developed by the accounting and regulatory world 

. . . do not fully capture the true economic risks of a securitized 

asset sale to the originator’s credit quality.’’ So, long ago, market 

insiders fully realized that standard accounting rules do not apply 

to securitizing firms. But while the market is well aware of these 

problems, excess returns in recent years led to regulatory and investor complacency and the financial crisis we have with us today. 

Recently, there have been suggestions that having sellers retain 

some risk in their securitizations can align incentives of sellers and 

investors as well as borrowers. The reality is that they have always 

retained risk, and that retained risk is precisely the problem. That 

retained risk is indelibly related to the variable interest entity that 

was the foundation of the proposed FASB revisions. Prior to financial engineering, ownership—and, therefore, on-balance-sheet treatment—was dictated by voting interest. If you owned more than 50 

percent of voting equity shares, then you owned the firm. 

With financial engineering, as demonstrated by Enron, all that 

changed. The first attempt to account for ownership in financially 

engineered construct was attempted in FASB 140, which stipulated 

that if somebody else did not own at least 3 percent of the funding 

liabilities and equity, you had to carry it on your own books. Of 

course, Enron found this requirement very easy to obviate by lending someone else money to buy the 3 percent and then selling the 

rest back by Enron guarantees, thus retaining a substantial firstloss stake in the arrangement. 

Under FIN 46, created to revise the rules that were used to create the failed Enron structures, the 3-percent rule became the 10- 

percent rule. The entities used by Enron were labeled ‘‘Variable Interest Entities,’’ and others were labeled ‘‘Qualified Special Purpose 

Entities,’’ or QSPEs, which were excluded from the 10-percent rule 

because they were thought to be what FASB termed ‘‘passive 

securitizations.’’ 

The key problem with us today is that the purportedly ‘‘passive’’ 

credit card, mortgage, home equity, auto loan, and other QSPEs 

are not really passive at all. Those passive structures routinely manipulate pool value through servicing and direct replacement of 

loans in the pools under representations and warranties, just like 

Enron. When there are no reserves behind the warranties, trouble 

is hidden until the product breaks down. When loan performance 

sours beyond the ability of the seller to support pool performance 

out of regular operating earnings, the seller has to either increase 

earnings or stem losses. Since the seller’s earnings primarily arise 


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through making new loans to generate underwriting fees, the seller, therefore, counterintuitively accelerates underwriting in these 

circumstances. Since better-qualified borrowers will most likely obtain cheaper loans from financially sound lenders, the seller targets 

down-market consumers—subprime borrowers—for the new business. Of course, less creditworthy borrowers mean more losses. As 

the firm enters a death spiral, it attempts to modify loans using 

repayment and forbearance plans, while aggressively re-aging loans 

and even committing fraud to classify as much of the portfolio as 

possible as ‘‘current.’’ 

The loan servicing rights that allow such practices are often the 

final asset remaining in the failing firm and the substantial potential for servicer malfeasance as the seller/servicer approaches bankruptcy can deteriorate their value significantly. Since there is so 

little to recover from a failed seller/servicer, the FDIC itself has 

maintained that it may disallow ‘‘true sale’’ status if it desires and 

seize those purportedly ‘‘truly sold’’ assets in a securitization to recover deposit insurance outlays. 

So this true sale that is the accounting foundation of 

securitization itself does not make sense. The problem is a tragic 

collision of economics, finance, and accounting. Economic risk has 

been placed where it is difficult to value financially and even the 

most complex accounting rules do not apply. 

Any discussion of necessary accounting reforms for securitization 

would be incomplete without a section on gain-on-sale accounting. 

In short, in gain-on-sale accounting, the first estimates the value 

of the thing that they want to sell with a financial model. Then 

they sell the thing and receive some money and other items in the 

actual sale of that thing. Then the firm gets to, last, record the difference between their own valuation of the thing that they sold and 

the value of the cash and other things that they received as cash 

revenue. Of course, this is not cash. So what we have here is a situation where many of the mortgage companies and similar firms 

that have been associated with previous securitization fiascos—and 

there have been many—have never been cash-flow positive in their 

entire corporate lives. So we have a financial world that is littered 

with hundreds of firms with exceedingly high stock values that had 

never actually earned positive cash profits in a manner typical of 

a classic bubble. 

None of the problems I review here are new, unique, or unknown, nor is their manifestation in today’s credit crisis. Rating 

agencies’ characterizations of past crises eerily presage the present 

crisis. In 2002, Moody’s wrote, and I quote, ‘‘The seller’s capital 

structure, its diversity of funding sources, types of assets, and the 

business factors motivating its securitizations are all important 

considerations. The examples of deals gone ‘bad’ over history reveal 

that an overreliance on securitization as a funding source is an important risk factor. The overuse of securitization coupled with aggressive gain-on-sale accounting was a particularly lethal combination. . . . New or unusual asset classes pose particular risks as 

well.’’ From 2002. 

The current crisis, therefore, was merely wrapping all these influences into one and applying them to nearly all collateral types 

in the market. 


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In conclusion, while FASB continues to try to pigeonhole 

securitization accounting into simple on- and off-balance-sheet classifications, the issue is far more complicated due to other legacy accounting treatments surrounding the entire securitization process, 

as well as securitizations’ unsettled legal status. And I think you 

talked a little bit about this with derivative product companies. We 

cannot expect any resolution to on- and off-balance-sheet treatment 

by continuing to implement the dichotomous approach used so far. 

Nor can we expect securitization accounting to improve significantly without removing other perverse incentives in gain-on-sale 

accounting and true sale status. 

So while all this does not augur for prohibiting securitization in 

the long term, it does provide a rationale for constraining financial 

product development in a manner similar to that written into H.R. 

6482 that was introduced in July on bond rating reform so that 

new products do not grow systemically large before finance and accounting can properly characterize their risks and their returns. 

So much work remains to be done to adequately characterize 

securitizations in a credible and transparent manner. Nonetheless, 

we have had several decades to get this work done already. The 

problems of both bond ratings and FASB, therefore, seem to be 

that a private organization is operating in the public interest with 

no overt responsibility or constraints imposed by the Government. 

Perhaps it is time to expect something better. 

Thank you. 

Chairman REED. Thank you, Professor Mason. 

Mr. Young. 

STATEMENT OF DONALD YOUNG, MANAGING DIRECTOR, 

YOUNG AND COMPANY LLC, AND FORMER FASB BOARD 

MEMBER 

Mr. YOUNG. Chairman Reed and Ranking Member Allard, thank 

you for your interest in improving financial reporting. 

Accounting standards have been a major factor in reducing 

transparency for investors and have directly contributed to the current credit crisis. I do not believe the proposed FASB solution will 

stop the ‘‘cycle of crisis’’ that we have now repeated. And I believe 

it would be a mistake to focus on expanded regulation alone. 

A better solution is to provide transparency in the reporting of 

securitizations and increase investor involvement in financial reporting to end this cycle of crisis. 

Now, under the proposed FASB solution, which was exposed on 

Monday, the self-administered test for qualified special purpose entities in Statement 140 will be replaced by another self-administered test in FIN 46(R). 

These custom designed entities that are the subject of the selfadministered test provide little transparency to investors, and they 

are not subject to the forces of the marketplace. They are custom 

designed. Their business purpose is to get favorable accounting 

treatment. 

The proposed rules will likely force consolidation of special purpose entities designed in the past. But the more important question 

is: Will future securitization structures enable management to inVerDate Nov 24 2008 02:26 Apr 02, 2010 Jkt 050413 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\A413.XXX A413

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appropriately de-recognize financial assets and gains? Unfortunately, I believe the answer is yes. 

Market transparency would be better served and the accounting 

simplified if the FASB had pursued a model where an originator 

continues to recognize financial assets and liabilities while there is 

any continuing involvement. The determination of whether a sale 

has occurred is shifted from management and auditors to investors 

and markets. 

In early 2005, when I joined the FASB, the Board was very 

aware of the problems in accounting for securitizations. It was the 

subject of a joint conference with the American Accounting Association where research was presented that indicated investors’ near 

complete distrust of FAS 140 accounting. Investors generally reversed the sale accounting propagated by the standard. 

By the way, I have submitted a copy of this research with my 

written testimony. 

The FAS Board was working on changes to Statement 140 which 

were exposed for comment in 2005, but very little progress was 

made in 2006 and 2007 when the subprime securitization was rapidly expanding. In fact, I think there were two or fewer board 

meetings held over a 2-year period. 

Now, for most of the period, there was an unending series of 

issues related to 140-and Larry Smith talked about some of those 

today—where we made little progress, and in my written testimony, I have outlined three troublesome examples of that. 

Now, there is no question that the FASB knew it had a serious 

problem in the financial reporting of securitizations. The question 

is: Why was it not addressed until after this crisis was evident? 

Now, when I asked the staff the reasons for the delay, I was informed that there were concerns over the standard-setting actions 

we were considering. The changes would more accurately reflect 

the underlying economics, but this in turn would undermine companies’ ability to execute securitizations worth many billions of dollars. In other words, it would be bad for business to provide transparency to investors—at least that could be said in the short term. 

There was unending lobbying of the FASB not just by preparers, 

which should be expected, who are in economic conflict with investors, but also by their regulators—all looking to preserve sale accounting for activities that clearly indicate that there was no sale. 

The SEC, for example, was actively involved in expanding the 

originator’s ability as a servicer to renegotiate loans yet still keep 

sale accounting and potentially harming investors in the 

securitization. I have also documented that in my written testimony in an SEC Office of the Chief Accountant letter from January 

of 2008. 

Another factor noted by the FASB staff was resistance from Federal Reserve regulators. 

Now, my purpose is not to argue that company managements 

need to be protected from harming themselves—because in the end 

that is what happened—nor is it to criticize regulators but, rather, 

to recognize the limitation of regulation. 

The essential problem is that the FASB is not capable of providing financial reporting transparency until a crisis provides the 


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political cover to overcome lobbying efforts that are in conflict with 

serving investors and providing transparency to the markets. 

Because managements and regulators control the financial reporting process, we will continue to be in the cycle of crisis where 

we are unable to address financial reporting problems until a major 

crisis unfolds. Enron all over again. 

Now, you can end the cycle of crisis only by engaging the markets and investors in the financial reporting process, which requires a fundamental change in the composition of standard setters 

and their trustees. Instead of token investor representation or, in 

the case of the FASB today, no investor representation, we need investors to be equally represented, both on the Board and in the 

trustees. Then we would have a chance of stopping the cycle of crisis. 

Thank you again, Mr. Chairman, for inviting me to testify at this 

hearing. I look forward to responding to your questions. 

Chairman REED. Thank you very much, Mr. Young. 

Ms. Mooney. 

STATEMENT OF ELIZABETH F. MOONEY, ANALYST, CAPITAL 

STRATEGY RESEARCH, THE CAPITAL GROUP COMPANIES 

Ms. MOONEY. Thank you, Chairman Reed and Ranking member 

Allard, for the opportunity to be here to testify on a very important 

issue to investors. 

I am an analyst with the Capital Group Companies and together 

with our affiliates we manage the American Funds mutual fund 

family and public and institutional retirement plans as well as private client accounts. We are long-term investors in equities and 

fixed-income securities globally, and we are one of the largest active institutional money managers. We manage accounts, over 55 

million accounts, primarily for individuals and institutions and employ over 9,000 people globally around the world. And we conduct 

extensive, fundamental research on companies and rely heavily on 

financial statements prepared by public companies. 

At the Capital Companies, we feel that it is critical that the 

views of investors are considered in establishing accounting standards. So thank you again for the opportunity to be here today. 

There are six points I wish to emphasize today. 

No. 1, that the current rules are inadequate and allow institutions to have too much, far too much involvement and risk exposures with entities off the balance sheet. 

No. 2, while the FASB rule proposals have just come out and I 

have not fully studied them, my preliminary view is that together 

they represent a good response and a significant improvement over 

what we have today. Reforms in this area need to be adopted on 

a timely basis. 

No. 3, the SEC should enforce the rules as enacted and not weaken them or permit management or auditors to weaken them 

through interpretation, as they did with the current rules. The inadequate accounting as well as the weak enforcement of the current rules equally contributed to the well-documented transparency 

problems. 

No. 4, the Congress should be supportive of FASB’s efforts and 

not undermine them. In the oversight capacity with respect to the 


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SEC, Congress should monitor and encourage enforcement of the 

new rules. Congress does not need to legislate in this area. 

No. 5, the FASB rule proposals are better than the current international standards, and we are waiting to see improvements to 

IASB’s draft proposal. The U.S. should not adopt the International 

Financial Reporting Standards if they are not substantially equivalent to the FASB’s rules. We must be sure this fix is not undone 

if IFRS rules are adopted in the U.S. U.S. and International standard setters should converge to the highest-quality accounting and 

disclosure requirements. 

No. 6, investors are an important constituent without a sufficient 

voice at the table in accounting standard setting, as Mr. Young alluded to. The FASB and IASB should expand investor representation on their boards. 

So it is important that the accounting gets fixed, that financings 

get reflected on the balance sheets on a timely basis. 

Thank you. That concludes my remarks, and I would be happy 

to answer any questions. 

Chairman REED. Thank you very much. 

Mr. Miller. 

STATEMENT OF GEORGE P. MILLER, EXECUTIVE DIRECTOR, 

AMERICAN SECURITIZATION FORUM 

Mr. MILLER. Thank you and good afternoon, Chairman Reed, 

Ranking Member Allard, and Members of the Subcommittee. I very 

much appreciate the opportunity to testify on behalf of the American Securitization Forum and the securities industry and Financial Markets Association. Our members include issuers, investors, 

financial intermediaries, and other professional organizations who 

are involved in the securitization and broader financial markets. 

Quality accounting standards are critically important to the accuracy, relevance, and utility of financial reporting for 

securitization transactions and to the efficient functioning of the financial markets generally. We, therefore, strongly support the need 

for high-quality accounting standards governing the removal of assets from a transferor’s balance sheet and, similarly, robust consolidation, financial reporting, and disclosure standards relating to offbalance-sheet entities. 

Briefly, ‘‘securitization’’ is a term that includes a wide range of 

capital markets transactions that provide funding and liquidity for 

an equally wide range of consumer and business credit needs. 

These include securitizations of residential and commercial mortgages, automobile loans, student loans, credit card receivables, 

equipment loans and leases, trade receivables, asset-backed commercial paper, and other financial assets. Collectively, 

securitization represents by far the largest segment of the U.S. 

debt capital markets, with over $10 trillion of mortgage- and assetbacked securities currently outstanding. 

Many, but not all, securitizations qualify for off-balance-sheet accounting treatment under current accounting guidance. By and 

large, these transaction structures are long established and are accompanied by extensive risk and accounting disclosures. We agree 

that a comprehensive review of de-recognition and consolidation of 

accounting standards is in order. However, we are very concerned 


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that FASB’s current proposals to amend FAS 140 and FIN 46(R) 

in the near term without sufficient consideration of other and possibly superior accounting frameworks may have serious and unintended consequences. Especially in light of the challenges facing 

our financial markets, we believe that a more thorough and deliberative process in developing these changes is essential and will 

produce better accounting policy, financial market and economic 

outcomes in both the short and long term. 

In particular, to the extent that FASB’s current proposals may 

result in widespread consolidation of existing and future 

securitization special purpose entities, the balance sheets of affected entities would swell, impairing financial ratios and disrupting financial covenant performance and regulatory capital 

tests. Importantly, these results would be produced not by any 

change in the economics of securitization transactions, but solely by 

a change in accounting standards. 

Although we cannot presently estimate which or how many 

securitization transactions would be affected by the proposed 

changes, consolidation of even a significant fraction of the multitrillion-dollar securitization market would represent a momentous 

shift. The consequence of this change could be a material reduction 

in the availability and increase in the cost of consumer and business credit, precisely at a time when the availability of capital, 

credit, and liquidity are severely constrained throughout the financial markets. 

We encourage FASB and the policymaking community to work 

together with the industry to develop a coherent, consistent, and 

operational securitization accounting framework that better reflects 

the economics of securitization transactions. We believe that a binary, ‘‘all-or-nothing’’ approach to consolidation—where an entity 

consolidates either all or none of the assets and liabilities that reside in a securitization special purpose entity—often does not reflect the underlying economics of those transactions. Overconsolidation of SPEs can be just as misleading to users of financial statements as underconsolidation. For these reasons, we believe that a 

different and more nuanced approach should be considered. 

For several years, therefore, we have advocated linked presentation as a concept that has great potential to resolve many of the 

issues and ambiguities that surround securitization accounting. 

Under a linked presentation approach, the non-recourse liabilities 

that are issued in a securitization transaction would be shown directly on the balance sheet as a deduction from securitized assets. 

We strongly advocate that FASB engage in a full exploration of 

linked presentation, among other possible alternatives, as part of 

the current round of accounting revisions. 

Finally, we believe that proceeding with significant accounting 

changes in the United States without meaningful convergence of 

international accounting standards in this area risks prolonged 

drain on the time and resources of FASB and industry participants 

alike. We believe that FASB should coordinate now with the IASB 

to develop and issue converged standards rather than proceeding 

with a separate initiative. 


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Thank you once again for the opportunity to present these views, 

and I look forward to answering any questions that Members of the 

Subcommittee may have. Thank you. 

Chairman REED. Thank you. Thank you very much, ladies and 

gentlemen. 

Let me just start with Mr. Miller. What further studies might be 

done to estimate the impact—your testimony suggests that there 

will be an impact; I think we all recognize that. But what studies 

should be done, or is it possible to quantify that impact? 

Mr. MILLER. Well, I think that is underway right now. I think 

the most important predicate to being able to do that is the 

issuance of guidance and to be able to evaluate that and develop 

a clear understanding of how FASB’s proposals would apply in 

practice to existing and future securitizations. So that is underway. 

Chairman REED. As I understand from Mr. Smith, the first significant implication of the changes would be disclosing these offbalance-sheet engagements, but not necessarily bringing them back 

onto the balance sheet. That sounds a little bit like the linked presentation you talked about. Is that sort of a fair or rough analogy? 

Mr. MILLER. Well, the linked presentation, as we have proposed 

it, actually would be an alternative accounting framework. The disclosures that other witnesses today have spoken about, I think it 

is important to recognize there are already disclosures in place relative to off-balance-sheet entities. FASB has proposed enhancements to those disclosures, and we certainly support enhanced disclosures as a step to aid and increase overall transparency regarding relationships with off-balance-sheet entities. Beyond that, what 

linked presentation would be is to serve as a potential alternative 

to the accounting framework that FASB is proposing. 

Chairman REED. Professor Mason and Mr. Young, your comments on sort of a linked presentation as an alternative to what 

FASB is proposing now or what you would think would be appropriate. 

Mr. MASON. I think a concept similar to a linked presentation 

makes sense for at least part of a new accounting paradigm in this 

area, particularly because there was discussion earlier today about 

financial models reporting things like mean loss estimate. And, of 

course, the first thing you learn in statistics is you do not just rely 

upon the mean but you examine the median, the mode, then you 

learn about standard deviation. 

So the linked presentation gives an idea of really how bad things 

can get, and if the bottom really fell out of the world, here is your 

total off-balance-sheet exposure that could be, as we have seen in 

recent cases, forced to be bought back through legal threats or 

other means. But this is your total exposure, a worst-case scenario, 

and leave it to the investor to participate in the process of valuation by deciding what is the probability of that worst-case scenario. 

Chairman REED. Mr. Young, do you have any comments about 

that approach? 

Mr. YOUNG. I actually strongly support it. I think that, in conjunction with the no continuing involvement, displays the information on the statement. You can use linked presentation as a de-recognition model. You can use it as a consolidation model. You can 


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use it as a note structure. But I think as a basic way of implementing any continuing involvement in securitization, it is the 

most rational way that I have seen so far. 

Chairman REED. Let me ask a question which will reveal, I 

think, my lack of accounting training. The disclosure is important 

to investors, but when you bring these assets on the balance sheet, 

it has a significant impact particularly for regulated financial institutions, the capital ratios that they must maintain. Is it possible 

that the disclosure, good disclosure would not be adequate because 

it would not be able to force the entity to raise sufficient capital? 

Is that a concern? 

Mr. YOUNG. Well, I think what we found, what I found is the 

compliance with disclosure is far below the compliance with statements, particularly to go after, Chairman Reed, what you said 

about capital requirements. One of the nice things about linked 

presentation is that you show sort of a net exposure which does not 

offset your—it does not make your total assets look large. It nets 

it down for the beneficial interest or other liabilities that stand 

against that asset. So, in a way, one of the attractions to linked 

presentation, at least in the preliminary work I saw in the FASB 

Board, was it would not screw up the capital markets. 

Now, I did not talk about measurement might be different and 

other things might be different, but the basic netting approach 

would preserve, I think, some of the regulatory capital issues. 

Chairman REED. Ms. Mooney, do you have a comment? I want 

to make sure that you have an opportunity on this issue. 

Ms. MOONEY. Well, I think the information on the balance sheet, 

it is about conveying information about judgments that are made 

by management and agreed to by auditors conveying that to investors; what happens with regulatory capital is between the banks 

and the regulators. But we are talking right now about reporting 

the information to investors, and we read a lot into the decisions 

about whether an asset or liability goes on the balance sheet or off 

the balance sheet. And we start with that when we are doing our 

financial analysis, we start with the balance sheet. So it is really 

critical to get that right and that financings are reflected on the 

balance sheet. 

Chairman REED. Professor Mason, do you have a quick comment? 

Mr. MASON. Yes, I just wanted to weigh in on this. My own research published in academic journals has shown that heavy 

securitizers have, at least in the past, typically held a little bit of 

extra capital on-balance sheet against the market risk that is out 

there, typically about 2 percent as compared to an 8-percent bank 

capital ratio. 

Furthermore, the bank regulators under Basel II are beginning 

to deal with some of these problems. The Basel II rules for credit 

card securitization, in fact, require a bank to start holding capital 

against their credit card securitizations as the performance of the 

loans in those pools begins to sour, recognizing that in kind of an 

end game, the bank will probably need some capital here to back 

some of that off-balance-sheet risk. 

Chairman REED. Thank you. 

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gesting that the SEC, in your case I think it gave permission to 

begin renegotiating contracts. Can you comment about what specifically happened with respect to the SEC interaction with the 

FASB rules? 

Mr. YOUNG. Well, I think it can change based on who is serving 

in those positions. 

Chairman REED. Right. 

Mr. YOUNG. I can only comment on the time I was on the FASB 

where I think a number of efforts—and I tried to document them 

in my written testimony. Part of the activity of what is allowed in 

this passive QSP entity that we have been talking about was put 

forward by the Office of the Chief Accountant. And I also include 

in my submitted written testimony some research done by the Federal Reserve of New York which talked about the steep economic 

conflict between the servicer, which was getting the ability to do 

more activities than 140 would normally allow and the investor, 

what conflict they were. And it was, Chairman Reed, a little crazy 

that here we are empowering the preparer or the servicer to take 

advantage of the investor. It is supposed to go the other way at the 

SEC. 

Chairman REED. Ms. Mooney, do you have a comment? 

Ms. MOONEY. No. 

Chairman REED. Because I think you made another comment 

with respect to SEC involvement. OK. Thank you. 

I will recognize my colleague, the Ranking Member, for his questions. 

Senator ALLARD. Thank you, Mr. Chairman. 

I inquired somewhat about the timeline in implementing these 

rules and regulations, and I think it was your letter, Mr. Miller, 

that maybe prompted that in that you suggested that for a longer 

timeline and give the public an opportunity to speak. Do you have 

a timeline in mind that would be adequate from your point of view? 

Mr. MILLER. Well, to clarify, we see the fundamental issue as 

being providing enough time to consider a range of potential alternatives to what has been proposed, including linked presentation. 

Perhaps there are other alternatives. We are not taking issue necessarily with the length of the comment period. I think 60 days is 

probably sufficient to comment on the rules as proposed, although 

I would note the effective comment period is 45 days because FASB 

has scheduled a public roundtable meeting earlier than the close of 

the comment process and would require anyone like ourselves who 

would wish to participate to have our comment letter in early. 

But leaving that aside, I think our fundamental concern is that 

there be enough time provided to consider other frameworks and 

have a thorough deliberation of them before making decisions 

about changes to accounting standards, and for that reason, we 

think the time should be taken between now—and we would agree 

with a 2010 implementation date as long as there is sufficient time 

allowed to thoroughly consider other potential alternatives. 

Senator ALLARD. So you do not think that all of the alternatives 

have been checked out thoroughly enough? Do I understand that 

right? 

Mr. MILLER. That is correct, and in particular relative to linked 

presentation, I believe FASB had indicated that they simply did 


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not feel that they had enough time to give that thorough or serious 

consideration, and we strongly believe that they should, again, 

among other potential alternatives. 

Senator ALLARD. I see. This question here is for all of the witnesses, and I hope I am not duplicating any questions that the 

Chairman may have asked while I was not here. I apologize for my 

absence. 

I like the idea of transparency, and I support it. I think it is key, 

if we want markets to work, to have informed consumers, and then 

they can make decisions themselves, not get too heavy on the regulatory side. 

These proposals could result in very significant changes to companies’ balance sheets in a relatively short period of time. Do you 

think that these sudden changes could in some way thwart the goal 

of transparency? Anybody want to comment on that? 

Ms. MOONEY. Having the transparency should help stabilize the 

situation. Providing investors with transparency should improve liquidity and help stabilize the market. 

Senator ALLARD. OK. So you do not think it any way or another 

we have kind of forced this to come about so quickly that transparency in some way would be maybe limited more than we would 

expect it to? 

Ms. MOONEY. Investors can use it and move on. Once they know 

what the facts are, they can digest it and move on. 

Senator ALLARD. OK. Mr. Miller? 

Mr. MILLER. Yes, I think our concern in that respect, as I indicated in my oral statement, would be that to the degree that adoption of these rules results in overconsolidation of special purpose 

entities, we do not see that as being particularly helpful. And I 

would just also comment I think it is important to have sound accounting rules and principles. There are many other steps that the 

industry can and should undertake to promote broader and better 

transparency about risk exposures in these vehicles, whether they 

are on or off balance sheet. 

Senator ALLARD. I see where you are concerned, not so much the 

time to implement it, but this consolidation. OK. 

In making the switch to accommodate these new off-balancesheet entities rules issued by the Financial Accounting Standards 

Board, many financial institutions would have to raise additional 

capital and significantly adjust their accounting practices. What 

will be the full practical impact of these changes in today’s world 

and the stress that everything is going through right now? And, in 

particular, how will these significant changes affect an already 

fragile and volatile market situation? Anybody want to comment on 

that? 

Mr. MASON. I want to say in reply to this and your previous 

question, I think rapid implementation of good accounting rules is 

not only desirable right now, but crucial right now. I think a rapid 

implementation of bad rules can indeed be tremendously disruptive. But, in fact, implementing a rule right now that would require 

the entire recognition of a securitized arrangement on-balance 

sheet enforce full capital raising against that, I think you are right, 

is tremendously disruptive right now, and it is not necessarily a 

good rule. 


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While there is not complete risk transfer in today’s securitization 

arrangements, there is some, as evidenced by the study I did that 

showed that certainly banks do hold some capital against their 

securitizations, even though they are not required to by regulators 

or under accounting rules. But, clearly, the market believes that 

there is a worthwhile goal of holding some capital. 

So I think if we are looking for a kind of recognition paradigm, 

an accounting paradigm, it is important, as Mr. Miller noted, to 

look outside the box a bit to get away from this on- or off-balancesheet paradigm and see where the reality really is. If investors are 

asking banks to hold not 8-percent but 2-percent capital, why 

shouldn’t a bank regulator require that 2-percent capital holding, 

which, in fact, the bank probably already has if it is a well-managed bank. So that well-managed banks are not disrupted by the 

transition, and, of course, ill-managed banks are. But then, again, 

they should be, to help them recognize their true financial situation, help investors see the situation, invest in the good banks, 

avoid the bad banks, and get over the crisis. 

Senator ALLARD. Yes? 

Mr. YOUNG. I guess, Senator Allard, I would look at that question a little bit differently in light of recent events. We just had an 

investment bank go bankrupt with a fair-value balance sheet that 

showed it had plenty of assets and liabilities. And it almost seems 

like financial reporting is out of control and not trusted and not believed in. And I think what we do here has got to establish transparency. 

If the transparency is such that we are going to bring out some 

bad news that was not there before, that is a risk. But I think the 

benefit of reestablishing confidence in the markets will overwhelm 

that. And I think, you know, for us to say let’s go slow or not proceed when we have lost all confidence in financial reporting in 

some cases now I think is a very difficult tradeoff to make. I would 

think we would be—we do not have a whole lot to lose right given 

the low level of confidence. 

Senator ALLARD. Any other comment on that question? Yes? 

Ms. MOONEY. I would just say that, you know, working on this 

issue has been in the works for research and study by standard 

setters for decades. So it is about time that we get it right, we get 

financings on the balance sheet, transparent reported, so we can 

get trust and confidence back in the markets. And we should be 

able to do this on a timely basis after all the work that has been 

put in. 

Senator ALLARD. Yes, Mr. Miller? 

Mr. MILLER. I would agree that it is very important to move forward quickly to develop and implementation sound accounting 

principles here. I believe there are great risks to the financial markets and to the economy of moving forward quickly with bad rules 

and specifically especially given capital liquidity credit constraints 

that are now being faced. It is not clear that there is sufficient capacity if many assets are moved back on-balance sheet for financial 

institutions to be able to provide funding for the business and credit—consumer and business credit needs that exist. So I think those 

risks are very serious. 

Senator ALLARD. Ms. Mooney? 


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Ms. MOONEY. As I mentioned earlier, in terms of capital, which 

you alluded to, regulatory capital decisions, if the Fed would feel 

it prudent to—for prudential regulations to exercise some forbearance on the capital and require more or less capital to be raised 

despite the accounting, it should be done. 

Senator ALLARD. Mr. Chairman, I have one more questions. Can 

I ask it? 

Chairman REED. Please. 

Senator ALLARD. In your testimony—and this is to you, Ms. 

Mooney—you testified that—or at least in your written testimony, 

you raised concerns about the possibility of IFRS standards being 

weaker than U.S. standards. How do you see these issues resolved 

in the context of convergence? 

Ms. MOONEY. I do not think we should be adopting IFRS if it is 

not substantially equivalent to what the U.S. FASB comes up with 

as a fix. Right now the international standard has as a lighter 

qualitative test that even with reputation risk that could lead to, 

you know, obligations to absorb losses that could potentially be significant, to not have to consolidate that, and also have significant 

voting rights to appoint directors. It would not be appropriate to go 

backwards and adopt that. So we should not unless we—— 

Senator ALLARD. So you would be opposed to the IFRS standards 

being applied at all? 

Ms. MOONEY. In this area, absolutely. If we fix it—if we fix it in 

the U.S. and come up with a higher-quality standard, convergence 

should not only occur unless we have the highest-quality accounting and disclosure adopted in the U.S. 

Senator ALLARD. OK. Thank you. 

Thank you, Mr. Chairman. 

Chairman REED. Well, thank you, Senator Allard. In fact, you 

asked precisely one of the questions I was going to ask to Ms. 

Mooney about this convergence issue of international standards 

and our FASB standards. 

The topic that I want to raise—and this is the end of the hearing, so it might require educating me, which would take years. So 

it is perfectly OK to say, you know, we will send you a note or 

something. 

It seems at the heart of this, Professor Mason and Mr. Young, 

you know, stepping away from specific items of disclosure or bringing back on the balance sheet, is this notion of whether it is a sale 

or financing. Does that have to be reconciled, or are we sort of suboptimizing by saying, well, we got into the sale box years ago, and 

now we just have to sort of do what we can to get as much information on the balance sheet, in some cases bring the entity back on 

the balance sheet? But if you can just briefly comment, Professor 

Mason and Mr. Young, and if Ms. Mooney or Mr. Miller want to 

also, on this whole issue of the sale versus financing. 

Mr. MASON. Well, you are right, that is a big issue in the accounting world. I have a working paper right now that looks at investor reactions to securitization and suggests that they react to a 

securitization as if it is a financing not a sale. But in a way the 

distinction is artificial. Perhaps securitization is something different. It is something in between. And, in fact, we should offer 

firms an array of different arrangements, perhaps spanning the 


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middle ground between financings and sales. And as long as we 

properly account for the risk transfer, I think that we have made 

the system more efficient. 

Now, the rub there is that accounting deals with accounting for 

returns. There is no accounting system for risk. And in this world 

where we have financial engineers shifting risk and moving risk 

and slicing and dicing risk, it becomes critical to at least attempt 

to track the risk, allocate it correctly, follow what the engineers are 

doing, and build smart accounting rules that can at least get close. 

And the problem is right now we are nowhere near close, and that 

is evidenced by the cliff risk that we see in the market today. We 

see firms that we thought there was no problem with suddenly fail. 

So, clearly, the accounting has missed something, and that is what 

we need to fix. 

Chairman REED. Mr. Young, your comments? 

Mr. YOUNG. Chairman Reed, I think that is a pivotal issue. The 

determination of the sale has become too complex for accounting. 

And when you look at the way securitizations can be structured, 

how you can slice and dice them and spread the risk, it is hard for 

FASB to come up with a way to do that. And that is why the statement prior to 140 has had problems, why 140 had a problem, why 

we had two exposure drafts that went nowhere in 2003 and 2005. 

And I just think it is time to step back and say let’s not make a 

judgment on whether they are sale or not by the accountants and 

the management. Let’s put that information in the financial statements in a way that is not detrimental to understanding and transparency, and let the investor and the market decide. That is really 

the gist of the question. 

I think, you know, to FASB’s credit, in some ways they did that 

in the disclosure requirements. In fact, if you are a sponsor, under 

FIN 46(R) that they are proposing, you have to disclose any exposure to a VIE where you are the sponsor, regardless of how significant it is. I am just saying, instead of it being on the disclosure, 

we ought to think more about putting that on the financial statements. 

Chairman REED. Ms. Mooney. 

Ms. MOONEY. I think the qualitative test is principles based, and 

as you alluded to earlier, that it would be unfortunate if companies 

defaulted to what we have today, which is broken, and I would 

hope that that would be seriously revisited if that is the behavioral 

fact pattern that results. But I do think, based on the examples 

provided and the implementation guidance in the proposal, that it 

would be a good step forward, especially and only if management, 

auditors, and regulators complied with and enforced the rules. 

Chairman REED. Mr. Miller, any comments? 

Mr. MILLER. No. 

Chairman REED. Thank you very much. Thank you very much 

for your testimony, and my colleagues might have their own statements, which will be made part of the record if they are submitted 

no later than September 25th. We might have additional questions 

for the record which we would get to you and ask you to respond 

within 2 weeks in writing back to us. 

Thank you very much for your very helpful testimony, and the 

hearing is adjourned. 


jbell on DSKDVH8Z91PROD with HEARING
32 

[Whereupon, at 4:20 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 


jbell on DSKDVH8Z91PROD with HEARING
33 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 85 here 50413A.001
34 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 86 here 50413A.002
35 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 87 here 50413A.003
36 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 88 here 50413A.004
37 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 89 here 50413A.005
38 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 90 here 50413A.006
39 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 91 here 50413A.007
40 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 92 here 50413A.008
41 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 93 here 50413A.009
42 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 94 here 50413A.010
43 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 95 here 50413A.011
44 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 96 here 50413A.012
45 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 97 here 50413A.013
46 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 98 here 50413A.014
47 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 99 here 50413A.015
48 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 100 here 50413A.016
49 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 101 here 50413A.017
50 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 102 here 50413A.018
51 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 103 here 50413A.019
52 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 104 here 50413A.020
53 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 105 here 50413A.021
54 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 106 here 50413A.022
55 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 107 here 50413A.023
56 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 108 here 50413A.024
57 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 109 here 50413A.025
58 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 110 here 50413A.026
59 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 111 here 50413A.027
60 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 112 here 50413A.028
61 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 113 here 50413A.029
62 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 114 here 50413A.030
63 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 115 here 50413A.031
64 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 116 here 50413A.032
65 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 117 here 50413A.033
66 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 118 here 50413A.034
67 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 119 here 50413A.035
68 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 120 here 50413A.036
69 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 121 here 50413A.037
70 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 122 here 50413A.038
71 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 123 here 50413A.039
72 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 124 here 50413A.040
73 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 125 here 50413A.041
74 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 126 here 50413A.042
75 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 127 here 50413A.043
76 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 128 here 50413A.044
77 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 129 here 50413A.045
78 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 130 here 50413A.046
79 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 131 here 50413A.047
80 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 132 here 50413A.048
81 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 133 here 50413A.049
82 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 134 here 50413A.050
83 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 135 here 50413A.051
84 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 136 here 50413A.052
85 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 137 here 50413A.053
86 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 138 here 50413A.054
87 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 139 here 50413A.055
88 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 140 here 50413A.056
89 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 141 here 50413A.057
90 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 142 here 50413A.058
91 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 143 here 50413A.059
92 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 144 here 50413A.060
93 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 145 here 50413A.061
94 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 146 here 50413A.062
95 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 147 here 50413A.063
96 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 148 here 50413A.064
97 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 149 here 50413A.065
98 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 150 here 50413A.066
99 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 151 here 50413A.067
100 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 152 here 50413A.068
101 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 153 here 50413A.069
102 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 154 here 50413A.070
103 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 155 here 50413A.071
104 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 156 here 50413A.072
105 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 157 here 50413A.073
106 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 158 here 50413A.074
107 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 159 here 50413A.075
108 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 160 here 50413A.076
109 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 161 here 50413A.077
110 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 162 here 50413A.078
111 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 163 here 50413A.079
112 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 164 here 50413A.080
113 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 165 here 50413A.081
114 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 166 here 50413A.082
115 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 167 here 50413A.083
116 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 168 here 50413A.084
117 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 169 here 50413A.085
118 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 170 here 50413A.086
119 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 171 here 50413A.087
120 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 172 here 50413A.088
121 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 173 here 50413A.089
122 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 174 here 50413A.090
123 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 175 here 50413A.091
124 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 176 here 50413A.092
125 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 177 here 50413A.093
126 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 178 here 50413A.094
127 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 179 here 50413A.095
128 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 180 here 50413A.096
129 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 181 here 50413A.097
130 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 182 here 50413A.098
131 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 183 here 50413A.099
132 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 184 here 50413A.100
133 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 185 here 50413A.101
134 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 186 here 50413A.102
135 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 187 here 50413A.103
136 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 188 here 50413A.104
137 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 189 here 50413A.105
138 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 190 here 50413A.106
139 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 191 here 50413A.107
140 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 192 here 50413A.108
141 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 193 here 50413A.109
142 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 194 here 50413A.110
143 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 195 here 50413A.111
144 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 196 here 50413A.112
145 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 197 here 50413A.113
146 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 198 here 50413A.114
147 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 199 here 50413A.115
148 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 200 here 50413A.116
149 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 201 here 50413A.117
150 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 202 here 50413A.118
151 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 203 here 50413A.119
152 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 204 here 50413A.120
153 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 205 here 50413A.121
154 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 206 here 50413A.122
155 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 207 here 50413A.123
156 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 208 here 50413A.124
157 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 209 here 50413A.125
158 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 210 here 50413A.126
159 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 211 here 50413A.127
160 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 212 here 50413A.128
161 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 213 here 50413A.129
162 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 214 here 50413A.130
163 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 215 here 50413A.131
164 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 216 here 50413A.132
165 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 217 here 50413A.133
166 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 218 here 50413A.134
167 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 219 here 50413A.135
168 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 220 here 50413A.136
169 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 221 here 50413A.137
170 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 222 here 50413A.138
171 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 223 here 50413A.139
172 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 224 here 50413A.140
173 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 225 here 50413A.141
174 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 226 here 50413A.142
175 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 227 here 50413A.143
176 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 228 here 50413A.144
177 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 229 here 50413A.145
178 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 230 here 50413A.146
179 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 231 here 50413A.147
180 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 232 here 50413A.148
181 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 233 here 50413A.149
182 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 234 here 50413A.150
183 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 235 here 50413A.151
184 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 236 here 50413A.152
185 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 237 here 50413A.153
186 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 238 here 50413A.154
187 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 239 here 50413A.155
188 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 240 here 50413A.156
189 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 241 here 50413A.157
190 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 242 here 50413A.158
191 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 243 here 50413A.159
192 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 244 here 50413A.160
193 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 245 here 50413A.161
194 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 246 here 50413A.162
195 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 247 here 50413A.163
196 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 248 here 50413A.164
197 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 249 here 50413A.165
198 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 250 here 50413A.166
199 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 251 here 50413A.167
200 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 252 here 50413A.168
201 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 253 here 50413A.169
202 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 254 here 50413A.170
203 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 255 here 50413A.171
204 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 256 here 50413A.172
205 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 257 here 50413A.173
206 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 258 here 50413A.174
207 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 259 here 50413A.175
208 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 260 here 50413A.176
209 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 261 here 50413A.177
210 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 262 here 50413A.178
211 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 263 here 50413A.179
212 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 264 here 50413A.180
213 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 265 here 50413A.181
214 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 266 here 50413A.182
215 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 267 here 50413A.183
216 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 268 here 50413A.184
217 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 269 here 50413A.185
218 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 270 here 50413A.186
219 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 271 here 50413A.187
220 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 272 here 50413A.188
221 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 273 here 50413A.189
222 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 274 here 50413A.190
223 


jbell on DSKDVH8Z91PROD with HEARINGInsert offset folio 275/400 here 50413A.191