16 Mar 2020

What is FASIT?

The use of a financial asset securitization investment trust (FASIT) was for the securitization of non-mortgage debts with short maturities. Examples of these short maturity debts include credit card receivables, car loans or personal loans.

KEY TAKEAWAYS

  • The use of a financial asset securitization investment trust (FASIT) was for the securitization of non-mortgage debts with short maturities. Examples of these short maturity debts include credit card receivables, car loans or personal loans.
  • Financial assets security investment trusts were introduced as a way for financial organizations to mimic the securitization benefits of real estate mortgage investment conduits, which were introduced as part of the Tax Reform Act of 1986.

Similar to real estate mortgage investment conduits (REMICs), which were created as part of the Small Business Job Protection Act of 1996, FASITs became attractive investment opportunities because they offered a high level of flexibility in securitizing short-term debts.

However, the ability to create and operate such trusts ended eight years later when provisions of the 1996 act that enabled these types of special purpose entities were repealed in 2004.

Understanding FASIT

Financial assets security investment trusts were introduced as a way for financial organizations to mimic the securitization benefits of real estate mortgage investment conduits, which were introduced as part of the Tax Reform Act of 1986.

This form of securitization allowed financial organizations to create special purpose vehicles for the pooling of mortgage loans. After pooling, the issuance of mortgage-backed securities (MBS), secured by those loans, is sold. Similar to collateralized mortgage obligations (CMOs), REMICs organized various mortgages into pools based on risk to issue bonds or other securities, which could trade on secondary markets.

But REMICs only allow securitization of mortgage-backed debt. Non-mortgage assets without collateral, such as credit card debt or auto loans, are ineligible. FASIT, however, allows the pooling of such debt so financial firms can issue asset-backed securities which could also trade on secondary markets.

Enron Scandal Brings an End to FASITs

The Enron collapse of 2001, the largest bankruptcy in American history until the subprime financial crisis in 2007 was also widely known as a major accounting and auditing failure. The Enron failure is one reason for the passage of the Sarbanes–Oxley Act of 2002 to improve reporting and regulatory compliance. This bankruptsy is also grouped with other high profile scandals: Tyco & Worldcom.

One major factor identified as a cause of that bankruptcy was Enron’s use of special purpose entities, such as FASITs. Enron’s use of financial asset securitization investment trusts (FASITs), in a way circumvented traditional accounting conventions. This circumvention allowed the company to understate its liabilities while overstating its earnings and assets.

For example, Enron disclosed to shareholders that it had hedged downside risk in illiquid investments using special purpose entities. However, they did not reveal that those entities included Enron’s own stock, so it did not protect the company against downside risk.

The United States Congress Joint Committee on Taxation investigated the scandal in 2003. The committee’s report notes that FASIT rules “first enacted in 1996, are not widely used in the manner envisioned by the Congress and have failed to further their intended purposes.” The report suggested that “the abuse potential inherent in the FASIT vehicle far outweighs any beneficial purpose that the FASIT rules may serve, and thus recommends that these rules be repealed.”

Those repeals were enacted when President George W. Bush signed the American Jobs Creation Act of 2004.

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