VIEs, on the other hand, are still used. These vehicles are thinly capitalized business structures in which investors can hold controlling interests without having to hold voting majorities. As of the fourth quarter last year, S&P 500 companies parked $1.7 trillion worth of assets in VIEs.
The revised standards were supposed to wreak havoc on bank balance sheets because, among other things, the rules for keeping loan-related assets off the books would be rewritten. At the time, bankers expected the rewrite would force them to consolidate big swaths of assets that were being held in VIEs and Qs. And consolidating the assets from the entities would have required them to increase the amount of regulatory capital they kept on hand — a charge to cash — and thereby reduce the amount of lending they could do. Dampening lending during a credit crisis, argued bankers, would hurt the recovery.
Since their enactment, the accounting rules have affected their industry big time. Of the companies reporting an impact, nine purely financial-sector outfits plus General Electric account for 96% of the $515 billion being consolidated during the first quarter, says Credit Suisse. Of that group, which includes Bank of America, JP Morgan Chase, and Capital One, Citigroup tops the list with an estimated $129 billion in assets being brought back on the books in the first quarter — which represents 7% of its existing total assets. The newly consolidated assets come in all shapes and sizes, says the report: $86.3 billion in credit-card loans, $28.3 billion in asset-backed commercial paper, $13.6 billion in student loans, and $4.4 billion in consumer mortgages, for example ($5 trillion of the $5.7 trillion held in VIEs and Qs is mortgage related). Citigroup also disclosed a $13.4 billion charge for setting up additional loan loss reserves and eliminating interest lost from consolidating the assets.
Of the companies that disclosed the financial-statement impact, only eight estimated the increase to be more than 5% of total assets, says Credit Suisse. Invesco was the hardest hit, reporting the highest percentage at 55%, bringing back $6 billion worth of assets during the first quarter. Invesco’s assets are parked in collateralized loan obligations and collateralized debt obligations.
Nonfinancial companies, such as Harley-Davidson and Marriott International, also reported relatively big percentage jumps compared with existing assets. Harley’s additional assets represent 18% of existing assets, or $1.6 billion; Marriott’s consolidation represents 13% of its assets, or $1 billion.