One more thing – we need to differentiate between capital notes and senior debt. To their credit the rating agencies changed their methodology (too late, of course) after Cheyne and Rhinebridge ran into trouble and said (in October or late September) that AAA notes would only stay AAA if they could withstand market value falls of four times what we’d already seen (already the largest ever fall in ABS values). That seems like a pretty reasonably assumption.

An additional concern is why the ratings agencies are sitting on their hands and have not yet downgraded these SIVs. With SIV NAVs now in the low $70s and near certain likelihood that the SIVs will fail to pay their coupons and need to write down their capital notes, the ratings agencies appear almost blind to the obvious. While the agencies may not want to create further pressure in the SIV space which create further asset selling, the role of the agencies is to opine on the payment profile of the instruments they rate; let the capital markets look after themselves.

This begs the question, to whom are the rating agencies responsible to -issuer or user of the rating? If the agencies don’t act, it looks like another example of collusion by the agencies with fee paying issuers. Washington Mutual and eAppraisal could learn from these practices!

Mike, Portland, OR

Agreed that the powers that be don’t step in until the train wreck has occurred.

While it would be better if the MLEC worked, let me continue being devil’s advocate. First, we have the problem of the remaining assets in SIVs who sell the better stuff to the MLEC. That stuff is likely to be regarded as even worse than it is.

And with the housing market continuing to deteriorate, and a Fitch report saying 44% of SIV assets are mortgage related, and only 2% of the total subprime, that says that the reservations go well beyond subprime. While the CDOs and subprime securities are taking the steepest downgrades, the concern seems to be widespread. Who knows how long the supposed AAA paper will remain AAA?

And in all the press reporting, I can’t recall seeing an investor express much enthusiasm. Aside from ones like Federated that own SIV paper and are therefore self-interested, the most positive responses have been along the lines of, “Yes, we’ll look at the details.” And conversely, I have heard a number of money market fund investors say they would sell out their holdings if their fund bought any MLEC paper.

Spec,

Interesting. Thanks for passing the info along.

MLEC will most likely help out the SIVs in the least trouble, those with the best assets, not the worst.

I too am skeptical that this vehicle will achieve all that much directly. As you say, it represents a small proportion of the assets involved, and you have to persuade CP investors to cough up.

That said, it might work anyway. Let me explain.

“investors will be reluctant fund assets that are almost certain to decline in price over their time horizon.”

Well, that depends on which investors you’re talking about. The CP investors, who will be doing most of the funding, are only exposed to the credit risk of the assets, which is pretty minimal (no subprime will be included, and it’s all triple-A or double-A, much of it international) and of the liquidity providers. The value of the assets is irrelevant to them.

The liquidity and capital providers, on the other hand, care very much about the price, because they are directly exposed to market value risk. Even so, if the vehicle holds assets to maturity, as I understand it is being designed to be able to do, then it should all be upside assuming no defaults. Even if it sells after several months or a year, nobody I speak to in the European market expects spreads to be wider in six months than they are now, absent a SIV firesale. Even so, it may be hard for bankers to justify to their risk managers tying up capital in ABS right now.

It seems to me that the idea behind MLEC is that it gives existing CP investors comfort that there will be a liquidity outlet for the worst off SIVs a few months down the line, thereby encouraging them to extend/roll their CP rather than demanding redemption when it’s due. By the time the extended CP maturity comes around, ABS prices will (so the idea goes) have recovered enough to take the SIVs’ net asset value out of danger, even if they’re effectively defunct in the long run. In other words, if MLEC works, it won’t be used. I’m far from convinced that CP investors will agree to that, however.

Aha, that is an important piece of the puzzle. I hadn’t realized that the SIVs were so significant relative to the total asset backed securities market.

But I am still skeptical that this will buy enough time…More time is better, but the MLEC will be at most $80 billion out of a total $320 billionish remaining market. It seems too small in size, and questionable as to whether it will hold enough paper off the market long to allow for an orderly liquidation, particularly since investors will be reluctant fund assets that are almost certain to decline in price over their time horizon.

If the consequences are this serious and the problem is this big, it suggests the need for a state-sponsored solution, with the guys who created the mess having to take some significant losses or pay some very steep charges to avail themselves of whatever solution is crafted. They most certainly can’t get a free pass.

Fundamentally, this whole scenario was caused by banks that made bad loans. Citi should be BK’d.

What people have to realise, and mostly don’t seem to, is that SIVs are the single largest investor class for triple-A asset backed securities in Europe and a very large part of the US investor base as well. In some asset classes they make up 80% of the triple-A investor base. If multiple SIVs are forced into a fire sale, the effects on European securitisation would be disastrous – spreads would at least double from their already record wide levels. This would in itself have some pretty terrible consequences – hugely increased funding costs for consumer finance companies, especially subprime lenders; effectively closing a major funding source for banks; huge mark to market losses at investment funds and for bank treasuries. It would also drag the rest of the credit markets out as well, partly because of the effect on banks and partly because of relative value.

There are many flaws with the superconduit, particularly around the pricing, but the conspiracy mongering seems to me to be driven largely by a failure to recognise this fact. There just isn’t enough capital in the banking system for large volumes of these assets to be taken fully on balance sheet, so the superconduit is a way of prolonging the winddown process.