Securitization Tested?Securitization Tested?The Enron Disaster The Enron Disaster

and Beyondand Beyond

Kellogg School of ManagementKellogg School of ManagementSecuritization ColloquiumSecuritization Colloquium

May 27, 2003May 27, 2003

Jim MountainJim MountainPartner,Partner, Global Markets Global Marketsjmountain@deloitte.comjmountain@deloitte.com

212-436-4742212-436-4742

Why is Enron on the Agenda?Why is Enron on the Agenda?

Little or no direct “securitization” activityLittle or no direct “securitization” activity

Synonymous with “off balance sheet” finance Synonymous with “off balance sheet” finance run amokrun amok

Sparked the firestorm of change that will Sparked the firestorm of change that will impact securitization going forwardimpact securitization going forward

Nexus of the demise of Arthur AndersenNexus of the demise of Arthur Andersen

Enron’s Got RhythmEnron’s Got Rhythm

(Fastow)(Fastow)

$168 to$168 to$276 MM$276 MM

$104 MM$104 MM

$80 MM$80 MM

Sources:Sources:

Powers ReportPowers Report& &

Joint Committee Joint Committee on Taxation on Taxation

ReportReport

February 2002February 2002

Accounting Issues & ActionsAccounting Issues & Actions

o 3% equity & consolidation of 3% equity & consolidation of SPE limited partnerships SPE limited partnerships

o Guarantees & risk transferGuarantees & risk transfer

o Related party transactionsRelated party transactions

o Uncollectible receivablesUncollectible receivables

o Taking profit on own sharesTaking profit on own shares

FIN 46 & FASB 140 FIN 46 & FASB 140 amendmentamendment

FIN 45FIN 45

Expense stock options?Expense stock options?

??

??

Other Regulatory FalloutOther Regulatory Fallout

Sarbanes-Oxley ActSarbanes-Oxley Act

Public Company Accounting Oversight BoardPublic Company Accounting Oversight Board

SEC turnoverSEC turnover

FASB ReorganizationFASB Reorganization

FASB Accounting StandardsFASB Accounting Standards FIN 45 – Guarantees, including securitization FIN 45 – Guarantees, including securitization

reps & warrantiesreps & warranties

FIN 46 – Consolidation of VIEsFIN 46 – Consolidation of VIEs Complicated new risk/return calculusComplicated new risk/return calculus No grandfather exemption for old dealsNo grandfather exemption for old deals Perverse resultsPerverse results

FAS 140 Amendment – Further limit QSPEsFAS 140 Amendment – Further limit QSPEs

International Accounting StandardsInternational Accounting Standards

Selected Sarbanes Oxley ActionsSelected Sarbanes Oxley Actions

Officer certifications of financial statements Officer certifications of financial statements and financial reporting controlsand financial reporting controls

Auditors to examine & report on financial Auditors to examine & report on financial reporting controlsreporting controls

Capital assessment on issuers to fund PCAOB Capital assessment on issuers to fund PCAOB and FASBand FASB

Trick an auditorTrick an auditor Go to jail! Go to jail!

Jim MountainJim MountainPartner,Partner, Global Markets Global Marketsjmountain@deloitte.comjmountain@deloitte.com

212-436-4742212-436-4742

QUESTIONS?QUESTIONS?