The Financial Accounting Standards Board's consolidation directive, FIN 46, was applied broadly and may have ensnared some managers of collateralized debt obligations that do not need to consolidate, according to Patricia Donoghue, a project manager at FASB. Some innocent entities may have been caught in the crossfire, she adds. However, citing Enron, she notes that the consequences of not consolidating are severe and that it is better in this environment to brush too broadly than risk not catching all those for which the rule was intended.
Jonathan Lavine, cio at Sankaty Advisors, a CDO manager, claims that consolidation of a CDO's assets gives an inappropriate view of an asset manager's business as it incorrectly implies they have a balance sheet. CDO investors are hurt by the rule because they may not be sophisticated enough to understand what it entails and that may lead them to unload CDO assets when it is in their best interests to hold on to them, he adds.
Phoebe Moreo, a partner at accountant Deloitte Touche Tohmatsu, agrees with Lavine that the requirement may affect the thinking of CDO investors. She questions whether there is any advantage in "giving the orphan a home," referring to special purpose entities. Furthermore, there is no apparent reason why investors would be better served by consolidation as opposed to a regime that deems a CDO structure parentless, she adds.