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Presentation
to the Federal Reserve Conference on Bank Structure and
Supervision 2003 - "Structured
Finance: Uses (and Abuses) of Special Purpose Entities" -
Presentation to the International
Monetary Fund on April 19, 2005
by
Janet Tavakoli
- Special
Purpose Entities: Uses and Abuses - Click
here for entire article as a pdf file.
Summary:
Special
Purpose Entities (SPEs), also known as Special Purpose
Vehicles (SPVs) are powerful structured finance tools.
Both the banking community and the investment community
have benefited as special purpose entities facilitated
bank balance sheet management and facilitated the creation
of
new investment
asset classes.
Special Purpose Entities are often
off-balance sheet, bankruptcy-remote,
and private. They can
easily be used for both legitimate and illegitimate
uses. Several structures lend themselves
to money laundering, disguising
loans as revenue to misstate earnings, concealment
of losses, embezzlement, and other accounting
improprieties.
Reaction to recent financial scandals threatens to
cripple
some
of the legitimate and beneficial uses of Special Purpose
Entities.
Definition
of Special Purpose Entity (SPE): Special
purpose entity is a global term and is used interchangeably
with the term Special Purpose Vehicle (SPV). Special
Purpose Entities are powerful structured finance
tools. An SPE is either a Trust or a Company.
Special purpose corporations are used for a variety
of purposes, including structured risk management
solutions. In securitizations, the SPE houses the
asset risk either through the purchase of the assets
or in synthetic form. The assets are then used as
collateral for notes issued by the SPE. SPEs can
be either on shore or offshore. SPEs are normally
off-balance sheet, bankruptcy remote, and private
nature.
All of the following are examples of SPEs: Special Purpose
Corporations (SPCs) which may or may not be Special Purpose Subsidiaries
or captives; Master Trusts; Owners Trusts; Grantor Trusts; Real Estate
Mortgage Investment Conduits (REMICs); Financial Asset Securitization
Investment Trust (FASIT); Multiseller Conduits; Single Seller Conduits;
and certain Domestically Domiciled Corporations.
Adapted and simplified from the following
source:
Tavakoli,
J. Collateralized Debt Obligations & Structured Finance, John
Wiley & Sons, 2003.
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