International Accounting Expert on Wall Street Litigation Matters

Dr. Barry Jay Epstein, CPA, is the lead co-author of "Wiley GAAP" and "Wiley IFRS," now in their 24th and 12th editions respectively. In this capacity, he literally "wrote the books" on U.S. and international accounting matters, ranging from the basics to even the most complex treatment of asset-based securities on the market today.

When the Resolution Trust Company (RTC) was gearing up to deal with the savings and loan (S&L) in the 1990s, Dr. Epstein taught RTC analysts about hedging strategies and derivative securities. He is available to assist attorneys and financial institutions on the topics outlined below.

Derivatives

A derivative is a financial instrument that transfers risk from one party to the other, as defined by the International Swaps and Derivatives Assocation (www.isda.org). It derives its value from the price or rate of some other underlying assets such as bonds, loans, equities, currencies, commodities, indices, published rates or combinations of those assets.

An ISDA survey released on September 24, 2008 reports that the notional amount outstanding of credit derivatives decreased by 12 percent in the first six months of the year to $54.6 trillion from $62.2 trillion, but the annual growth for credit derivatives was 20 percent from $45.5 trillion at mid-year 2007.

Securitization

Securitization is a "structured finance" process. Financial managers combine (or "pool") and "repackage" financial assets (such as home mortgages or other groups of consumer loans) into a new form of security. These "asset backed" securities, which derive their value from the cash flow of the underlying debt instrument, are then sold to investors. In the case of securitized home mortgages, the new financial instrument is known as a "mortgage backed security" (MBS).

Many financial assets can be securitized, as long as they are associated with cash flow. If the underlying security loses value due to a mortgage default that impairs the cash flow, the mortgage backed security also loses value.

A "special purpose vehicle" (SPV) is often used to create the structure for the securitized assets. The SPV may also be known as a special purpose entity (SPE) or special purpose company (SPC). A credit rating agency typically reviews the asset backed securities and assigns a rating. Investors rely on the rating to evaluate the risk of default and determine an appropriate interest rate for the asset backed securities.

Fair Value Accounting

FASB Statement no. 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Statement no. 157 became effective for annual statements for fiscal years beginning after Nov. 15, 2007, and for interim reports prepared in that initial fiscal year.

The SEC's Office of the Chief Accountant issued clarification on the use of fair value accounting in a September 30, 2008 press release, available at: http://www.fasb.org/news/2008-FairValue.pdf.