Question: In this current financial crisis, I keep hearing about “off balance sheet” transactions. I’m old enough to remember Enron’s collapse, which also entailed “off balance sheet” transactions.
What are these (I think they are also referred to as structured vehicles) things, and how under FASB rules are they legal? I just don’t understand how, if they contributed to the Enron debacle, they were allowed to continue for another 8 years.
Paul Solman: As some regulation expert once said to me, if a firm is intent on hiding information, it can be awfully hard for regulators to unearth it. Today’s “SIVs” — “structured investment vehicles” — are indeed yesterday’s SPEs: “special purpose entities” of the sort Enron excelled in. (For outrageous yet true examples, see our Enron explainer, Accounting Alchemy.)
In essence, SIVs, SPEs, or whatever you call them are all subsidiaries of the parent company legally structured so as to be or seem independent, and thus off the parent’s balance sheet. Not unlike a typical tax dodge, their actual “legality” depends upon being caught and then successfully prosecuted.