Comments on: In Case You Thought the Credit Crunch Was Over….(SIV Rescue Edition) http://www.nakedcapitalism.com/2007/10/in-case-you-thought-credit-crunch-was.html Sun, 22 Nov 2009 06:06:33 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Charlie http://www.nakedcapitalism.com/2007/10/in-case-you-thought-credit-crunch-was.html#comment-1055 Charlie Mon, 15 Oct 2007 04:48:00 +0000 http://www.nakedcapitalism.com/2007/10/in-case-you-thought-the-credit-crunch-was-oversiv-rescue-edition/#comment-1055 Just like LTCM, but this time it's Citi that's in trouble.<br/><br/>Citi needs a bailout, but they don't want to admit it. So they are crying about "contagion" and running to their friends in the government (what about free markets?).<br/><br/>The trouble will be getting the other banks to agree on the price. The reason LTCM worked out was because the bankers got a good deal, and probably had a good clue that the Fed was going to start lowering rates to increase the value of the LTCM stake they were buying.<br/><br/>Buying into this mega-SIV scheme is a whole different scenario. The assets going in won't have good value. I just don't see it as a short-term liquidity or market problem, as they are making it out to be. With LTCM, they had bet interest rate differentials would close. They just got their timing wrong. And so there was value in LTCM's portfolio over the long run. Buffett knew that and that's why he tried to by LTCM.<br/><br/>This stuff that Citi holds, however, looks to have less and less value as the mortgage mess unfolds, so who's gonna want to buy into this scheme? Unless Paulson can get his friends at the Fed to agree to lower a LOT, it will be tough to get other bankers to commit to this scheme. Just like LTCM, but this time it’s Citi that’s in trouble.

Citi needs a bailout, but they don’t want to admit it. So they are crying about “contagion” and running to their friends in the government (what about free markets?).

The trouble will be getting the other banks to agree on the price. The reason LTCM worked out was because the bankers got a good deal, and probably had a good clue that the Fed was going to start lowering rates to increase the value of the LTCM stake they were buying.

Buying into this mega-SIV scheme is a whole different scenario. The assets going in won’t have good value. I just don’t see it as a short-term liquidity or market problem, as they are making it out to be. With LTCM, they had bet interest rate differentials would close. They just got their timing wrong. And so there was value in LTCM’s portfolio over the long run. Buffett knew that and that’s why he tried to by LTCM.

This stuff that Citi holds, however, looks to have less and less value as the mortgage mess unfolds, so who’s gonna want to buy into this scheme? Unless Paulson can get his friends at the Fed to agree to lower a LOT, it will be tough to get other bankers to commit to this scheme.

]]> By: Yves Smith http://www.nakedcapitalism.com/2007/10/in-case-you-thought-credit-crunch-was.html#comment-1044 Yves Smith Sat, 13 Oct 2007 20:33:00 +0000 http://www.nakedcapitalism.com/2007/10/in-case-you-thought-the-credit-crunch-was-oversiv-rescue-edition/#comment-1044 Anon of 12:30 PM,<br/><br/>I agree it would be salutary, in the long run, to let a big player fail, but no one has the nerve. Look what happened to poor Mervyn King, the governor of the Bank of England. He clearly believes in moral hazard, yet capitulated when a bank run started at a second tier institution. Admittedly the facts were different, since England didn't at the time have sufficiently effective depositors insurance, but the general message (via Martin Wolf at the FT) is the same: when banks play a game of chicken with central bankers, the banks will win. So if that is where things stand, that big losses at big banks will wind up being socialized, that says we really need to rethink regulations.<br/><br/>Anon of 1:34 PM,<br/><br/>The thought of this rescue not getting done had crossed my mind too. The reason LTCM did get rescued was that it was a fast-moving situation, and the time pressure forced the otherwise argumentative bankers to agree to arrangements that none of them were happy with. <br/><br/>This situation may not be either big enough or imminent enough to spur that kind of beahvior. One has to wonder whether this is a big deal for any big bank save Citi. Anon of 12:30 PM,

I agree it would be salutary, in the long run, to let a big player fail, but no one has the nerve. Look what happened to poor Mervyn King, the governor of the Bank of England. He clearly believes in moral hazard, yet capitulated when a bank run started at a second tier institution. Admittedly the facts were different, since England didn’t at the time have sufficiently effective depositors insurance, but the general message (via Martin Wolf at the FT) is the same: when banks play a game of chicken with central bankers, the banks will win. So if that is where things stand, that big losses at big banks will wind up being socialized, that says we really need to rethink regulations.

Anon of 1:34 PM,

The thought of this rescue not getting done had crossed my mind too. The reason LTCM did get rescued was that it was a fast-moving situation, and the time pressure forced the otherwise argumentative bankers to agree to arrangements that none of them were happy with.

This situation may not be either big enough or imminent enough to spur that kind of beahvior. One has to wonder whether this is a big deal for any big bank save Citi.

]]> By: Timothy http://www.nakedcapitalism.com/2007/10/in-case-you-thought-credit-crunch-was.html#comment-1041 Timothy Sat, 13 Oct 2007 17:34:00 +0000 http://www.nakedcapitalism.com/2007/10/in-case-you-thought-the-credit-crunch-was-oversiv-rescue-edition/#comment-1041 Reading about the plan (incidently Reuters has some details; it sound awfully like the much derided Japanese convoy system to me where weak banks (in this case SIVs) are merged into the stronger ones. We know how that worked out: prolonged deflationary crisis but no widescale social disruption. Maybe we should be learning the lessons of what happened there although I doubt US bankers will be quite as prepared to "take one for the team" as the collectively minded Japanese were. This being the case one wonders if this will ever get of the ground as nobody will agree on the value of the respective collateral the be injected. Reading about the plan (incidently Reuters has some details; it sound awfully like the much derided Japanese convoy system to me where weak banks (in this case SIVs) are merged into the stronger ones. We know how that worked out: prolonged deflationary crisis but no widescale social disruption. Maybe we should be learning the lessons of what happened there although I doubt US bankers will be quite as prepared to “take one for the team” as the collectively minded Japanese were. This being the case one wonders if this will ever get of the ground as nobody will agree on the value of the respective collateral the be injected.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/10/in-case-you-thought-credit-crunch-was.html#comment-1040 Anonymous Sat, 13 Oct 2007 16:30:00 +0000 http://www.nakedcapitalism.com/2007/10/in-case-you-thought-the-credit-crunch-was-oversiv-rescue-edition/#comment-1040 " Some markets have been experiencing illiquidity "<br/><br/>Yellen is a liar and a shill. The reason there is no buyer for Citi's crap is because they want money for something that has no value.<br/><br/>It's time for that poorly mismanaged company to be bankrupted once and for all. Risk exists, bankruptcies of large corporations such as Enron do happen - and it's time US banks start realistically managing the risk of the loans they make. ” Some markets have been experiencing illiquidity “

Yellen is a liar and a shill. The reason there is no buyer for Citi’s crap is because they want money for something that has no value.

It’s time for that poorly mismanaged company to be bankrupted once and for all. Risk exists, bankruptcies of large corporations such as Enron do happen – and it’s time US banks start realistically managing the risk of the loans they make.

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