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• W1602376922 abstract "ABSTRACTSpecial Purpose Entities (SPEs) are business entities that exist for narrow purpose, such as securitizing portfolio of receivables or financing the acquisition of building. These thinly capitalized entities are often created to help sponsoring firm limit exposure to financial risk or obtain access to low-cost The origins of SPEs can be traced back to the 1970s, when they were used to monetize very narrow set of bank loans. By the 1990s, SPEs had become more commonplace, being used to securitize variety of financial assets and provide structure to facilitate leasing By the 2000s, SPEs had become an essential piece of the financial system, providing the structure necessary to securitize mortgage lending. While these entities were extremely effective at removing risky assets from an individual financial institution 's balance sheet, they also created shadow banking system that exposed the U.S. economy to excessive financial risk. This paper discusses the complex issues related to SPEs, their interaction with Structured Investment Vehicles (SIVs), and the role that SPEs played in contributing to the 2008 financial crisis.INTRODUCTIONIn October of 2001, energy giant Enron spiraled quickly into following revelations of wide spread accounting fraud that hid enormous amounts of debt and losses. At the heart of this fraud was web of accounting structures known as Special Purpose Entities (SPEs), which allowed Enron to exclude large amounts of debt from the company's balance sheet. Less than six years later, in March 2007, the failure of New Century Financial, the second largest sub-prime mortgage lender in the U.S., signaled the beginning of financial crisis that would prove to be one of the worst in U.S. history. Once again, unanticipated losses residing in SPEs that were not included on the company's balance sheet catapulted the company into failure.Over the last four decades, SPEs have evolved from an exotic financing structure that was used sparingly, to complex vehicle that is at the center of the U.S. and global financial systems. While many of these structures are legitimate and offer viable mechanism for distributing risk through the capital markets, their close association with financial crisis means that they can also be tool for fraud and imprudent management. In the remainder of this article, we: (i) introduce the structure of special purpose entities, (ii) review the history of SPEs, (iii) explore their connection and contribution to structured investment vehicles (SIVs), and (iv) discuss their impact on the 2008 financial crisis.SPECIAL PURPOSE ENTITIESGorton & Souleles (2007, p. 550) define special purpose entity as a legal entity created by firm (known as the sponsor or originator) by transferring assets to the [SPE], to carry out some specific purpose or circumscribed activity, or series of such transactions. A primary benefit of the SPE structure is its favorable accounting treatment, which is termed sheet financing. If the sponsor meets certain criteria, the SPE will be treated as separate economic entity for financial reporting purposes. This allows the sponsor to remove the assets and liabilities that are housed in the SPE from its (the sponsor's) balance sheet. Since most SPEs are highly leveraged, this reduces the sponsor's debt load relative to equity. As result, the sponsor will likely achieve higher credit rating, which reduces its overall borrowing costs.To achieve these desirable accounting results, an SPE has several essential characteristics:1. It must be separate legal entity from the sponsor,2. The entity is bankruptcy remote,3. It is created to carry out fairly specific activity, and4. It is thinly capitalized, (i.e., heavily leveraged), with the residual equity ownership held by third party other than the sponsor.Each of these characteristics is necessary for the SPE to achieve its ultimate objective, which is to provide off-balance sheet financing for the sponsor. …" @default.
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• W1602376922 date "2014-04-01" @default.
• W1602376922 modified "2023-09-23" @default.
• W1602376922 title "Special Purpose Entities and the Shadow Banking System: The Backbone of the 2008 Financial Crisis" @default.
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