FASIT

What Was a FASIT?

The use of a financial asset securitization investment trust (FASIT) was for the securitization of non-mortgage debts with short maturities. Examples of these short maturity debts include credit card receivables, car loans, or personal loans.

Similar to real estate mortgage investment conduits (REMICs), which were created as part of the Small Business Job Protection Act of 1996, FASITs became attractive investment opportunities because they offered a high level of flexibility in securitizing short-term debts.

However, the ability to create and operate such trusts ended eight years later when provisions of the 1996 act that enabled these types of special purpose entities were repealed in 2004.

Understanding a FASIT

Financial asset securitization investment trusts (FASITs) were introduced as a way for financial organizations to mimic the securitization benefits of real estate mortgage investment conduits, which were introduced as part of the Tax Reform Act of 1986.

This form of securitization allowed financial organizations to create special-purpose vehicles for the pooling of mortgage loans. After pooling, the issuance of mortgage-backed securities (MBS), secured by those loans, is sold. Similar to collateralized mortgage obligations (CMOs), REMICs organized various mortgages into pools based on risk to issue bonds or other securities, which could trade on secondary markets.

But REMICs only allow securitization of mortgage-backed debt. Non-mortgage assets without collateral, such as credit card debt or auto loans, are ineligible. FASITs, however, allowed the pooling of such debt so financial firms could issue asset-backed securities that could also trade on secondary markets.

With the passing of the American Jobs Creation Act of 2004, FASITs were repealed.

Enron Scandal Brings an End to FASITs

The Enron collapse of 2001, the largest bankruptcy in American history until the subprime financial crisis in 2007, is a widely known major accounting and auditing failure. The Enron failure is one reason for the passage of the Sarbanes–Oxley Act of 2002, which has the goal of improving reporting and regulatory compliance. This bankruptcy is also grouped with other high-profile scandals: Tyco and Worldcom.

One major factor identified as a cause of Enron's bankruptcy was Enron’s use of special purpose entities, such as FASITs. Enron's use of financial asset securitization investment trusts (FASITs), in a way, circumvented traditional accounting conventions. This circumvention allowed the company to understate its liabilities while overstating its earnings and assets.

For example, Enron disclosed to shareholders that it had hedged downside risk in illiquid investments using special purpose entities. However, they did not reveal that those entities included Enron’s own stock, so it did not protect the company against downside risk.

In addition to using FASITs, Enron used a variety of special purpose vehicles (SPVs) and real estate mortgage investment conduits (REMICs) in different deals to alter accounting entries as well as to falsify financial information. Enron continuously refused to provide detail on its SPVs, which after the fact was clear as to why. It is scandals like this that have made reporting requirements more stringent.

The United States Congress Joint Committee on Taxation investigated the scandal in 2003. The committee’s report notes that FASIT rules “first enacted in 1996, are not widely used in the manner envisioned by the Congress and have failed to further their intended purposes.” The report suggested that “the abuse potential inherent in the FASIT vehicle far outweighs any beneficial purpose that the FASIT rules may serve, and thus recommends that these rules be repealed.”

Those repeals were enacted when President George W. Bush signed the American Jobs Creation Act of 2004.