But the overall outlook is bleak, as pressure on lending is likely to raise the risk of “significant weakness” in economic activity, the note said

I meant in terms of the need/value of the SIV rescue plan and events contributing to the credit crisis. E*Trade’s unravelling is not a systemic event; the company is far too small a credit market player. It has gotten more coverage than the size of its exposure warrants because it is a well recognized brand. And it now looks likely to be acquired. The shareholders may take a bath, but this is not going to precipitate a crisis in the credit markets.

I am not quite certain what you mean as regards the Bank of England. Mervyn King is still trying to talk a tough moral hazard line, despite being pressured by the FSA and Treasury into bailing out Northern Rock (it was a joint operation).

The Financial Times in particular argued that Northern Rock should not have been bailed out; its failure was too small to constitute a systemic event. However, the press surrounding it triggered a run which was caused in large measure by defects in the UKs’ deposit insurance regime (observers noted in fact that the design of the insurance program, which is only partial and slow to pay, was almost guaranteed to cause a run). Those shortcomings have since been remedied. Had the new regime been in place earlier, Northern Rock would very likely have been permitted to go under.

Having Citigroup or another large financial institution go on the ropes, or having a large volume of SIV assets hit the market is quite another matter. And Citi is stressed on so many fronts that it is apparently unable to resolve its SIVs on its own, which were it not so beleagured, should be well within its capacity.

HSBC is a hopeful but far from conclusive sign that the big players may decide to work out this mess themselves, rather than rely on convoluted, resource draining solutions to problems that far from the biggest facing the financial markets. As the Financial Times’ Lex column noted:

Still, while the SIV sector is under fire, the potential hit to money market funds does look like one contagion story too far. First, the exposure is small: Bank of America research estimates about 5 per cent of the assets under management of prime money market mutual funds are invested in SIVs. Second, asset managers are able to take action to ward off panic. The fact that some are taking proactive measures now actually reduces the need for a rescue plan, along the lines of a super SIV, currently being worked up by a number of banks. Third, they are benefiting from good industry trends right now, as shown by strong asset inflows.

Yes, SIVs are cause for concern, but ironically, the SIV rescue plan has made the problem seem larger than it really is. There is now a bit over $300 billion in SIVs remaining. 70% NAVs translate into a little over 2% loss in principal. This is in a market were investors are paid not to risk principal, so they now won’t touch the stuff.

However, this translates into $6-$7 billion in losses, Even if the losses are understated by 200%, we are talking $18-$21 billion in losses versus $250 to $500 billion for subprime, $100 to $150 billion for commercial real estate, and God only knows how much for CDOs, but $200 billion is probably only a starting point.

Tell that to Bank Of England and Etrade, which is down 81%; SIVs are just one type of off balance sheet entity using synthetic swaps to enhance bets, which are like viruses that almost every financial entity caught, i.e, subprime flu may have started with citi or Goldmans, or Wells, or Ban of America…but obviously the flu is spreading to the tune of $500 Billion to date, and counting! The daily connections are like watching a SARS-like virus spread and infect safe havens. To assume its all over and just a Citi problem is being naive! All the models are broken and the chips are falling fast.

It may turn out that the whole SIV problem is primarliy a Citigroup problem. Some smaller SIVs have been liquidating, and they haven’t been large enough to trigger the fire sale scenario that has caused so much worry. And if a bank has reasons not to liquidate (they may legitimately think the assets would go for prices below fundamental value, and prefer to ride it out, selling opportunistically), much better for them to act like adults and be responsible for the situation they created.

There was speculation early on that the SIVs rescue entity would not make sense for the stronger banks. HSBC’s move bears that out. Having more banks follow their example would signal confidence in their financial position.

They’re using their balance sheet directly to provide liquidity but are leaving the credit risk with junior investors.

Isn’t this good news in terms of restructuring possibilities elsewhere?

Go ask Bank Of England or think in terms of the SIV Bailout……guess its good if you can dump bad bets at the casino onto taxpayers!

They’re using their balance sheet directly to provide liquidity but are leaving the credit risk with junior investors.

Isn’t this good news in terms of restructuring possibilities elsewhere?

Date: Monday, July 23 2007

NEW YORK — Fitch expects to rate HSBC Credit Card Master Note Trust (USA) I, series 2007-1 Notes as follows:

–$677,550,000 1mL + TBD class A ‘AAA’;

–$72,450,000 1mL + TBD class B ‘A’.

Also see: Bank of Americas MBNA Credit Card Trusts, IMHO being used for Northern!