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The whole issue of securitization and the accounting treatment of such are over my head at this point. I'm trying to learn about it, and the CFS experience is a major caution flag to anyone in this business. I suspect other investors may have a similar issue valuing companies that may be dependent upon that method for continuing growth of profits.
Another young, small company that I'm in the process of studying is involved in debt extension and securitization, but takes a different accounting approach. First Sierra Financial (Nasdaq: FSFH) does lease financing, securitizes the debt and sells the resulting bond, but just last year, made a conscious decision to handle the accounting for the securitization and sale transaction differently.
If I understand it (which I'm not sure I do), instead of putting the debt off their books and taking a gain on sale, FSFH keeps the debt and records the income from the lease payment stream over time. This accounting change resulted in a diminution of their recorded earnings now, but may result in higher earnings later. Its a strategy that appears to defer recognized income rather than accelerate it on their income statement. Their approach seems more conservative than CRDT's is, which seems to depend upon estimating and recognizing today income that may not actually be earned until a later accounting period.
Yet the market appears to have reduced their valuation of FSFH compared to that it places on CRDT, perhaps because of the lowered earnings "today." The Street likes earnings today.
I don't know a good way to value these companies, which is one reason this thread is valuable to me. I don't see securitization itself as a bad thing. Securitization and sale of asset-backed securities is a legitimate and important capitalization tool in a growing number of financial fields. And financial guarantee insurance is, as you point out, a specialty field that can be a trap for the unwary or inexperienced. But its availability has resulted in greater marketability of asset-backed securities like those sold by CRDT.
You seem to see CRDT as incorporating some inherent flaw in its business model, but I don't think I understand just what that flaw is, as you see it. CFS' inherent flaws appeared to have been in the honesty of their accounting for the residual value of their asset, and in their willingness to incorporate their own inflated valuation of blocks of debt into their bids for that debt, which drove the auction price of that debt over the level where it could be profitably collected. I don't see a flaw in the inherent nature of securitization and asset-backed securities.
But I may be missing the main thrust of your concern with the CRDT business model. Could you expand a bit more on your concerns?
Doug (no position in CRDT or FSFH) |
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