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Businesses often face criticism for engaging in financial activities with no genuine business purpose other than to minimise taxes or enhance financial statements. Opponents of financial engineering highlight notorious cases like WorldCom, Enron, and Long-Term Capital Management, where accounting abuses and aggressive tax avoidance strategies created significant public backlash. For many critics, any financial structure that reduces taxes, bypasses regulations, or artificially inflates financial metrics is inherently suspect and deserving of condemnation. Rule Arbitrage challenges that view, arguing that a subset of these financial transactions, often criticised as rule arbitrage, can be legitimate, providing real benefits while staying within the bounds of both legal language and legislative intent.
Through clear explanations and 20 detailed case studies, Oussama A. Nasr defends these structures, showing they can achieve legitimate tax savings, regulatory relief, or other business advantages without violating the spirit of the rules they operate within. Written in accessible language, the book covers a range of financial topics including senior/subordinated debt, prepaid forwards, collateralized loan obligations, and credit default swaps.
Designed to educate both casual readers and finance experts alike, Nasr provides insight into how these structures work, addressing objections, and demonstrating why many of these transactions are deserving of respect rather than condemnation. With an eye toward both practical application and regulatory context, this work offers a balanced perspective on the complex world of rule arbitrage.
Financial structuring that leverages tax, accounting, and credit rating agencies rules can have a significant impact on a company's bottom line. When combined with derivatives, it becomes a powerful—yet potentially dangerous—mix that, if pushed too far, can lead to disaster, as in the case of Enron. Oussama Nasr, who has been in the trenches himself, has written a valuable and practical book on this often esoteric subject—one that practitioners rarely discuss openly and for which reliable material is hard to come by. Read it—and then read it again.
— Kosrow Dehnad, Columbia University, USA.
This book fills a crucial gap by delivering a comprehensive, lucid, and elegant treatment of various types of rules-based arbitrages. Mr. Oussama Nasr’s unique academic background - holding an MA in Mathematics and Philosophy from the University of Cambridge and a Juris Doctor from Cornell Law School - perfectly combines with his multifaceted professional experience as a lawyer, banker, and financial consultant. His distinctive perspective and pedagogical skills render challenging concepts accessible without compromising depth. A basic-to-intermediate understanding of finance is the only required prerequisite to read, learn and enjoy this book; no prior expertise in accounting, regulation, credit ratings methodologies, or tax or other law is necessary. This book is poised to become the definitive reference for rigorously and clearly navigating these types of rules-based arbitrages. I strongly recommend it to individuals and institutions seeking a deeper, nuanced understanding of the variety of topics on rules-based arbitrage.
— Armando Mariante, Former Deputy-CEO of National Bank for Economic and Social Development of Brazil (BNDES) and former CEO of Scotiabank Brazil
This is a wonderfully rich and detailed book. Nasr writes with great authority, clarity and wit - it's surprising how much humour lies in some of these transactions. He covers a wealth of knowledge, I'm sure even the most experienced financier will find much to learn here, and to think hard on. Highly recommended.
— Simon Taylor, Management Practice Professor of Finance, Judge Business School, University of Cambridge
Oussama A. Nasr has worked for years as lawyer, banker, financial trainer, and consultant in North America, Europe, the Middle East, and Asia. He began his career at the corporate law firm of Shearman & Sterling, specializing in syndicated loans, asset securitizations, and country debt restructuring. At Citigroup he was Managing Director in charge of emerging market securitization and senior transactor in global derivatives. He established DNA Training & Consulting 27 years ago. He lives in Beirut, Lebanon.
Introduction
Chapter 1. Credit Ratings and Regulatory Arbitrage: AAA-Rated Hedge Fund Investments
Chapter 2. Credit Ratings and Regulatory Arbitrage: Senior/Subordinated Transactions
Chapter 3. Accounting and Covenant Arbitrage: Prepaid Forward
Chapter 4. Accounting Arbitrage: Total Return Swaps on Equity Investments
Chapter 5. Accounting Arbitrage: Total Return Swaps on Own Equity
Chapter 6. Regulatory Arbitrage: Balance Sheet Synthetic CLO
Chapter 7. Covenant Arbitrage: Circumventing No Refinancing Covenants
Chapter 8. Covenant Arbitrage: Synthetic Dumping
Chapter 9. Accounting Arbitrage: The Michelangelo Swap
Chapter 10. Tax and Accounting Arbitrage: SPAMS
Chapter 11. Reputation Arbitrage: Lebanon’s Riskless Bond
Chapter 12. Tax Arbitrage: Universities as Conduits
Chapter 13. Tax Arbitrage: Reducing Taxes on Securities Trading
Chapter 14. Tax, Regulatory and Credit Rating Arbitrage: Bank Hybrid Capital
Chapter 15. Leveraged Investments
Chapter 16. Accounting and Credit Ratings Arbitrage: Forward Equity Purchase
Chapter 17. Covenant Arbitrage: Leveraged Inverse Floaters and Orange County
Chapter 18. Covenant and Regulatory Arbitrage: Creating “Phantom” Claims Against the Borrower
Chapter 19. Tax Arbitrage: Weak Currency Debt Structures
Chapter 20. Credit Ratings Arbitrage: AAA-Rated Swap Dealers