The global financial crisis : securitization and fair value reporting practice
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This thesis examines securitization and fair value reporting practices during the global financial crisis. Specifically, Chapter 2 evaluates the circumstances surrounding the financial distress experienced by Countrywide Financial Corporation (Countrywide). Chapter 3 evaluates whether the information disclosures released by Countrywide in the lead up to its near bankruptcy provided information about the risks that other firms were exposed to more generally, and whether this information was reflected in the stock prices of the other firms. Finally, Chapter 4 examines whether the concerns relating to the relevance of Level 3 financial assets measured under Statement of Financial Accounting No. 157 are primarily attributable to those assets arising as a consequence of securitization transactions (i.e., retained interests and mortgage service rights) rather than Level 3 assets generally. The primary motivation for this thesis is to contribute to the regulatory debate that is occurring in the aftermath of the global financial crisis (GFC). Of particular concern is whether this debate is correctly identifying the causes of the GFC and to provide evidence relating to: claims of the lack of transparency associated with securitization transactions, and whether the criticism directed at financial reporting is correctly focused. The key findings of this thesis suggest that while Countrywide perhaps is an extreme example, its mortgage banking activities and the sudden financial distress it experienced as a consequence of these activities, typified the problems that beset firms in the financial services sector during the GFC. The risks associated with Countrywide’s securitization activities were not well reflected in the financial statements, and the disclosures of these transactions and their cumulative impacts are not clearly disclosed which likely impeded investors’ pricing decisions. The results of Chapter 3 provide evidence consistent with the concern that the opacity and complexity of securitization activities reduced the capacity of investors to value the firms’ equity. During the six months preceding Countrywide’s acceptance of the Bank of America’s offer of a $4.1 billion merger deal (January 11, 2008), Countrywide released material disclosures to the Securities and Exchange Commission (on Form 8-K). These disclosures generated significant abnormal returns to the common stock of the (non-) regulated and non-financial firms’ common stock which is consistent with the disclosures releasing information that alerted investors to the true risk levels common to other firms. The magnitude of the returns realized can partially be explained by the firms’ securitization activities, leverage, liquidity and profitability. Chapter 4 provides evidence that concerns relating to the reduced relevance of Level 3 fair value assets are primarily attributable to those assets arising as a consequence of securitization transactions (i.e., retained interests and mortgage service rights) rather than Level 3 assets generally. Furthermore there is evidence that the disclosures relating to securitization transactions are likely insufficient and potentially relevant information is being omitted from the financial reports. Accordingly, the criticism being leveled against Statement of Financial Accounting Standards No. 157 might more correctly be directed towards Statement of Financial Accounting Standards No. 140 (FASB 2000).
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