Talk:Special purpose entity

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This is a paragraph in "The Roaring nineties" by Joseph Stiglitz page 129

...The ethos at the time was to avoid as many taxes as possible, and the Reagan administration helpfully provided business (and affluent citizens) with host of new tax-dodging techniques. A firm was entitled to an investment tax credit, for example, when it bought a machine. But if the firm had no income to begin with, the credit had little value. To get around this difficulty, companies resulted to complex lease deals. Instead of buying a machine with borrowed money from say GE credit, a company would have GE credit buy it and rent it back to the company. The payment was the same....

Boy, i don'y feel like typing the whole section, so i will dive to the relevant section

..In the succeeding years, even more complicated devices were invented, partly to take advantage of different tax laws in different countries. It become common for numerous parties to figure in a single transaction-the kind of equipment purchase that in the past, would have entailed only one buyer and a seller or at most a buyer, a seller and a bank, which rent money. An American firm might sublease a piece of computer equipment to a foreign firm, created for that express purpose, and the foreigh firm might go to sublease it to another American firm (Also created for that purpose), who would make a single up-front payment to the foreign firm, but borrow the money from one branch of the bank and (to make sure the foreign firm didn't run off with the money) immediately deposit it into another branch of the same bank. The foreign firm might then contribute the capital - which consist of nothing more than the bank account and its pledge to pay the lease payments its obligated - to a partnership. A year later (Seemingly by agreement), the partner would buy out the new "partner," recording loss on its books on the deal. Other firms might be brought into the tax scam. This whirl of mini-transactions was meant to make the mind spin-to obscure the fact that nothing real was going on, and, to rob the US treasury.

I typed the second paragraph for two reasons:

• To support an edit i intend to include in the special purpose entity article.
• Seek assistance - I am sincerely lost. Would someone reword the paragraph above and potentially include some text graphic of what Stiglitz described above please ?

Contents 1 NPOV 2 Grammar and spelling errors 3 SPEs and Sarbanes Oxley 4 Removal 5 Removed EDS SEC reference

[edit] NPOV

This article would benefit from clean-up. First off, the coup d'etat example in the lead paragraph is quite sensational and sets the tone that SPEs are used primarily to circumvent laws and control environments. And as we all know, the SPE would not protect the owners from prosecution for committing the crime described.

The abuses (like Enron's) should be discussed in more detail, but so should the Itanium project and like SPEs.Bollar 12:20, Jun 23, 2005 (UTC)

I will have to admit that the example may stuck out a bit. I honestly can't even remember reading SPE used in that manner except on a novel, Dogs of war by Frederick Forsyth. That doesn't however mean it hasn't happened. See, by giving that example, I wasn't implying that you wouldn't get in trouble for evil committed through an SPE, but it certainly make it hard to get in trouble. That is supported by the fact that, most of the SPE are doing jobs that their mother companies would not like to be associated with. i.e. It make them feel safe to decouple themselves from work that is ethically in the grey area or completely evil. I can restate your complains this way, "Sarbanes Oxley garantee companies will not lie about their financial state". That statement is however false. Sarbanes Oxley only make it hard for such event to happen. 64.229.8.117 13:32, 6 November 2005 (UTC)

[edit] Grammar and spelling errors

I was reading a slashdot discussion the numerous writing errors that exist on most on line work. That triggered me to read some of my post here (Something i rarely do) and couldn't help being ashamed. The only consolation was this post, a post that explain most of my errors. The only thing we disagree on is I am open to criticism. [1] gathima 2 July 2005 16:02 (UTC)

[edit] SPEs and Sarbanes Oxley

I confess that I liked SPEs for some reasons, and I still like them, but they may be too dangerous after Sarbanes Oxley.

I considered them "structured risk management solutions"

My friends from accounting considered them "balance sheet management solutions"

Before Sarbanes Oxley, it would be difficult to persuade large companies not to use special purpose entities (SPEs). A SPE was the perfect tool for "financial engineering". You could easily generate profits when needed or even hide assets and liabilities.

SPEs have some great advantages:

1. Attract investors

These business entities are formed for the purpose of conducting a well-specified activity (that is the reason they are called "special purpose" entities). Investors often like that everything is clearly specified by design, that there will never see transactions and activities they will not like. There is a specific project, a well-defined risk and return.

2. SPEs have been used for decades

It was (before SOX) the best entity to raise financing for large international projects.

3. Limits the liability of a company

It was 2001... Enron shares fell from US$85 to US$0.30. Too bad for a "blue chip stock", a real disaster. This happened after it was revealed that much of its profits and revenue were the result of deals with SPEs, special purpose entities . The result of this was that many of the losses that Enron suffered were not reported in its financial statements.

Sarbanes Oxley is here to "restore investor confidence." You must be very careful with SPEs.

The general rule is: Special Purpose Entities must be consolidated in an enterprise’s (“primary beneficiary”) consolidated financial statements. There are exceptions.

After Sarbanes Oxley Act, U.S. and non-U.S. public companies have to disclose in registration statements, annual reports and proxy statements all material off-balance sheet transactions, obligations, contingencies and other relationships of the company with unconsolidated entities or other persons that may have a material current or future effect on its financial statements.

Banks... Banks are significant users of SPEs, not only for their own benefit, but also for their customers.

There are several thousand SPEs sponsored by banks. Most are affected by SOX.

It is for sure: We will see more SPEs being consolidated. Even in banks, the use of SPEs will be less widespread.

I do not like companies that use SPEs for illegal purposes. You can see the result: We can not use SPEs today, even for legal purposes. Everybody believes that what you want to do is money laundering, off balance sheet transactions, mischaracterize revenues and losses, perpetrate fraud on unwitting fund investors, move money offshore for tax evasion, channel funds to terrorist operations, disguise the source of money for illegal sales...

George Lekatis Senior Risk and Compliance Consultant and Trainer www.sarbanes-oxley-training.com

[edit] Removal

I removed the following text because it lends negative bias to the article. Something is either legal or not, and is not barely legal due to the morals or ethics of the author.

• They allow a company to operate in a barely legal manner. For example, companies sometimes use special entities to employ workers without paying them benefits. This is the bone of the relationship between Walmart and Orientex Inc, an apparel company whose sole client is Walmart. Orientex is located in Torbay Road, Toronto.

[edit] Removed EDS SEC reference

The SEC questions regarding EDS are around the former CEO's statements and use of options on its own stock, not SPEs. So, I removed the EDS SEC reference.