The company said restatements are due to an error in the GAAP accounting treatment for certain of the company's assets -- specifically, credit risk transfer securities issued by government-sponsored enterprises (GSE CRTs) and
interest-only strips of residential mortgage-backed securities that are guaranteed by a US government agency (Agency MBS IOs).
Expect to see more innovation in products in the ETF space that navigate interest rate risks, including those that utilize
interest-only strips that can provide income with a negative duration.
6) The first is credit-enhancing,
interest-only strips.
Accordingly,
interest-only strips have a greater prepayment risk than do other MBSs.
The guidance addresses the risk-based capital treatment for (1) split or partially rated instruments, (2) nonqualification of corporate bonds or other securities for the ratings-based approach, (3) spread accounts that function as credit-enhancing
interest-only strips, (4) audits of internal credit risk rating systems, and (5) cleanup calls.
Since these residuals, called retained
interest-only strips, are reported on a bank's balance sheet, they overstate the bank's book value if they are overvalued.
1 million payment due to an unnamed lender, which PacificAmerica says at this point is requiring only payments on the
interest-only strips receivable securing the financing.
Interest-only strips, loans or other receivables, or retained interest in securities that can conceptually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment, should be subsequently measured like investments in debt securities classified as available-for-sale or trading securities under FASB 115.
Some of these REITs also are investors in
interest-only strips, which plummet in value in high prepayment situations.
These losses followed earlier reports of public investors who failed to follow diversification practices and invested the majority of their portfolios in risky instruments, such as principal-only or
interest-only strips.
Financial services revenue; total revenue; selling, distribution, and administrative expenses; operating income; other non-operating income; provision for income taxes; net income; and earnings per diluted share are presented below both as reported (on a GAAP basis) and excluding (i) the effect of the $18 million charge recorded in the first quarter of fiscal 2010 relating to matters arising out of the Federal Deposit Insurance Corporation's compliance examination of World's Foremost Bank, (ii) the impact of valuations of our
interest-only strips, cash reserve accounts, and cash accounts associated with our securitized loans recorded in fiscal 2009, and (iii) the impairment and restructuring charges recorded in fiscal 2009.
The guidance addresses risk-based capital treatment pertaining to (1) split or partially rated instruments, (2) nonqualification of corporate bonds or other securities for the ratings-based approach, (3) spread accounts that function as credit-enhancing
interest-only strips, (4) audits of internal credit-risk rating systems, and (5) cleanup calls.
