FIN 46 May Result in ‘Courting’ of Hedge Funds

By Christopher Faille, Reporter
HedgeWorld Tuesday, July 22, 2003

NEW YORK (HedgeWorld.com)—FASB’s new rule, Financial Interpretation Number 46, details the consolidation of variable interest entities.

One expert in credit derivatives, Janet Tavakoli, said that she believes the new rule may be causing unintended harm to some corporations and banks, which have made legitimate use of special purpose entities, but that there is a silver lining for hedge funds because they will be sought out as attractive participants for ownership of the “first 10%” of the variable-interest entities.

“There will be a big education push to get more hedge funds involved in these matters—hedge funds will be courted,” she said.

Ms Tavakoli, author of Credit Derivatives & Synthetic Structures: A Guide to Instruments and Applications, has a new book coming out this summer on new developments for CDOs. She believes that FIN 46 is a reaction to the financial chicanery that Enron engaged in, and, though she supports “regulators and accountants looking at deals like that and saying ‘wait a minute, you didn’t really get this off your balance sheet,’” she feels FIN 46 might be overkill. “Many banks and corporations have employed special purpose entities for legitimate purposes. They may be in jeopardy,” she said.

Mr. Mazin said that accountants regard the rule as troublingly vague. Ernst & Young recently prepared a 100-page report on it, which had to leave many questions open. But he did agree in general with Ms. Tavakoli’s thesis about the “wooing” that hedge funds will receive as a consequence. “It’s going to go well beyond funds that are involved in CDOs,” he said. “It’s going to involve funds of funds, also.”

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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009).

Clients of Tavakoli Structured Finance have the benefit of proprietary consultation, which is not available in any other paid or public forum. Clients also commission proprietary research and analysis.

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