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Southern Arizona Endodontics
Dental Assistant General
A1 Communications
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RANCHO RESORT
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Sierra Tucson
Eating Disorders Program Coordinator

As George Miller welcomed 60 bankers to the chandeliered Charlotte City Club one evening in September, the bankers, members of the American Securitization Forum, fretted about the future of their $10.7 trillion industry.

The bankers were warned that a Financial Accounting Standards Board plan would force trillions of dollars back onto balance sheets, from which they had been allowed to disappear. The change would have required the bankers' cash reserves to soar.

Their business of pooling and reselling assets had dropped 47 percent in the first six months of 2008, and the industry couldn't afford another setback.

The next day, Miller, 39, the forum's executive director, took that argument from North Carolina to a Senate hearing in Washington that was examining the buildup of off-balance-sheet assets. Miller was trying to preserve an accounting rule for off-the-books assets that helped U.S. banks export toxic debt around the world.

The damage to date: more than $680 billion in losses and writedowns, about one-third of that by European banks.

Efforts by industry lobbyists have delayed FASB decisions and kept key parts of the American financial system beyond the reach of regulators. They ensured that over-the-counter derivatives such as mortgage-backed securities stayed unregulated and persuaded the Securities and Exchange Commission to reduce capital requirements for broker-dealers, allowing investment banks to increase borrowing and magnify profits. Only after the subprime market collapse did the Federal Reserve move to tighten mortgage-industry standards.

Today, a road snakes from the foreclosed homes of Arizona, Florida and other states to the capital cities of Europe, where politicians and bankers have struggled to contain a widening credit crisis by pumping hundreds of billions of euros into the financial system. The road was paved with decisions like ones by the FASB that allowed banks to keep shifting assets into blind spots outside the view of shareholders and industry overseers.

"I've always regarded it as a bit of a magic trick," Pauline Wallace, a partner at PriceWaterhouseCoopers LLP and team leader in London for financial instruments, said of off-balance-sheet accounting. "The risk is somewhere, but you never knew where."

Pushed by taxpayers angry about financing a bailout of Wall Street while their retirement accounts wither, Congress is likely to shake up bank and securities regulation, giving the Fed more power.

That's ironic to Donald Young, an investor advocate who was a FASB board member from 2005 until June 30. He testified at the same Senate hearing on Sept. 18 that both the Fed and the SEC joined the banks they oversaw in resisting proposals for more disclosure of off-the-books assets.

"There was an unending lobbying of FASB" by companies and regulators, Young said.

The accounting standards board, housed in a corporate office park in Norwalk, Conn., an hour northeast of New York City, operates in an unusual position between the public and private sectors. It was set up in 1973 as an independent rule-making group, though the SEC gets a say in who is named to the board and can override its rules.

For the past decade, the FASB has been wrestling with how to account for off-balance-sheet assets, which include the majority of securitized financial products. In a securitization, a company pools loans such as mortgages and credit-card receivables, slices them into securities and sells them to investors, usually through a separate trust.

The process allows the originating company or bank to get cash upfront, while investors are paid off with the consumers' monthly payments. The issuer can also record profit from the sale to the trust and take the loans off its balance sheet. That reduces the amount of capital required as a buffer against losses, letting the company increase lending and boost earnings.

Citigroup Inc. reported it had $1.18 trillion in off-balance-sheet holdings as of June 30, including $828.3 billion in qualified special purpose entities, or QSPEs, a type of trust that is supposed to be beyond a lender's control.

Banks also created off-balance-sheet entities known as structured investment vehicles, or SIVs, that were marketed to outside investors. SIVs purchased many of the mortgage-backed notes issued by QSPEs, either directly or through other structures called collateralized debt obligations.

Ten years ago, Wall Street was enjoying a bull market fueled by a booming dot-com industry; a Fed chairman, Alan Greenspan, who trusted the market to correct its own ills; and a Congress willing to lighten the touch of regulators.

Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the- counter derivatives. In 2000, Congress passed a law keeping them unregulated.

Levitt said he went along with concerns by Greenspan and Rubin that Born's action might throw derivatives contracts into "legal uncertainty." He said he now regrets that he didn't press a presidential advisory group "to take a closer look" at the issue. Rubin said in an interview that "you could have had chaos" if Born's plan found existing derivatives contracts invalid because they weren't traded on an exchange. Both Born and Greenspan declined to comment.

For years, companies were allowed to push an entity off their books if an outside party put up as little as 3 percent of the capital.

Houston-based Enron Corp. declared bankruptcy in late 2001 when forced to put trusts back on its balance sheet because it hadn't met the 3 percent rule.

Miller, of the securitization forum, said in an interview that the industry got a bad rap from the Enron bankruptcy and that equating off-the-books entities with "fraud or abuse" is "clearly an over-generalization."

Still, the Enron scandal put pressure on the FASB to make it harder for banks to keep assets hidden. In January 2003, it proposed a new rule, known as FIN 46, which increased the outside- party requirement to 10 percent.

In May 2007, after the subprime mortgage crisis began to unfold, the accounting board proposed abolishing QSPEs altogether. It approved the move this April.

"We now know with hindsight that some of these entities, treated as Qs for accounting purposes, were effectively ticking time bombs," FASB Chairman Robert Herz said in a Sept. 18 speech in New York, referring to rising subprime defaults. "And the bombs started to explode."

In July, the FASB decided to postpone the effective date of the changes for a year, to Nov. 15, 2009. That came after the industry complained the board was moving too fast and the results would confuse investors.

At hearings in Congress in October, financial experts and industry groups urged House and Senate committees to consider changes, including a regulator with overall authority to protect the system from risk.

Then, Greenspan was blasted at another House hearing for failing to curb the growth of subprime-mortgage loans. He came out in favor of new rules requiring issuers of securitized assets to "retain a meaningful part of the securities they issue."