Bad times – New opportunities: Accounting & Business

Posted on January 28, 2009 · Posted in Accounting & Business

Despite a rising number of job losses in the firms, the credit crisis continues to offer opportunities for accountants. The latest is the UK Government’s Asset Protection Scheme.

Dozens of accountants will work with Credit Suisse, Citibank and the Treasury to value UK banks’ securities and loans that the UK Government has agreed to underwrite in its efforts to stimulate lending.

With the Government acting as an insurance underwriter, the Asset Protection Scheme cannot proceed until there is a clearer understanding of risks, the level of exposure for the taxpayer and the size of premiums to be paid by the banks.
 
The UK Treasury is coy about how it will value assets. The problems are obvious: there is no functioning market to sell them into and banks remain reluctant to lend. In an interview towards the end of last year, Lloyds TSB’s chief executive Eric Daniels estimated that actual losses incurred by the banks, globally, range between $2,000bn and $3,000bn – yet only $800bn had by then been written down.
 
Because of the potential scale of the securities-backed losses, no budget for the Treasury’s scheme has been revealed. Nor can any budget be produced accurately until more work is done on valuing the securities. There are criticisms that the Treasury is entering into a financial commitment that is uncapped and long term – it is expected to last at least five years.
 
The process of initial asset valuation, according to a Treasury insider, will not be quick, but ‘will take weeks, not months or years’. More details of the scheme should be announced in the last week of February. Even then, the size of the potential liabilities is likely to remain uncertain. The scheme will be operational from April.
 
‘All participants in the scheme will be required to meet the highest international standards of public disclosure in relation to their asset books,’ specifies the Treasury, formally. But informally the Treasury is sceptical. ‘The banks may have a good idea of the value of the assets, but they won’t share that with us,’ says a Treasury source.
 
Credit Suisse and Citibank should certainly understand the issues involved – they have both been heavily exposed by the loan securitisation market and each has had to make significant write-downs so far. Both will bring in large numbers of accountants to work with them. The arrangements for doing this have not yet been settled.
 
Speaking at a press conference, the newly appointed financial services secretary to the Treasury, Paul Myners, said that a prerequisite of the scheme was analysing over a billion pieces of data that will be reviewed by accountants, actuaries and lawyers.
 
A range of different types of securities will be covered by the guarantees. These include portfolios of commercial or residential properties; structured credit assets, including some asset-backed securities; some corporate and leveraged loans; and some related hedges held by participating banks. The scheme is designed to target asset classes most affected by current economic conditions – concentrating on property-related and mortgage-related assets.
 
All the UK’s largest banks will be expected to participate, beginning with the Royal Bank of Scotland. But there will be demanding terms for banks’ involvement. Initially only the larger banks may participate – those with at least £25bn of recognised assets. The banks will have to prove either their capital adequacy – apparently beyond the demands already imposed by the FSA – or that they have a realistic strategy for restoring capital adequacy. The scheme may be extended to smaller financial institutions, especially where the Treasury believes their survival is important for the functioning of the economy and public confidence.
 
Institutions will have to make significant write-downs of the securities in order to participate, but the scale of this will have to be negotiated with the Treasury on the basis of the valuation process led by Credit Suisse and Citibank. The banks will also have to ringfence the insured assets in order to give the Treasury a level of control of the securities.
 
Premiums will be paid to the Treasury. But the institutions will still have to bear a large share – perhaps the majority – of realised losses. The Treasury will merely accept some – probably 90% – of any exceptional losses. Premium payments will also be unorthodox. While the institutions will be able to pay by cash, they will be given other ‘credit’ options – such as issuing of capital instruments other than ordinary shares.
 
The Treasury expects the scheme to be successful in boosting lending and restoring banks’ share prices. It predicts that other countries will copy the scheme, with international co-ordination to be established on implementation by different governments.