SIV Rescue Plan Delayed, May Be in Trouble

The Financial Times appears to have broken a story (nothing similar yet on Bloomberg, the Wall Street Journal, or the New York Times), “Risk of securities fire sale mounts,” reporting that the structured investment vehicle rescue plan, the so-called Master Liquidity Enhancement Conduit (MLEC) is suffering from delays and failure to expand its support beyond the initial backers, Citigroup, JP Morgan, and Bank of America.

The delay comes just when CDO defaults and writedowns are picking up steam. To the extent that SIVs hold CDOs, investors are gong to be very reluctant to fund them at anything higher than very distressed values until the market has stabilized at a new level (assuming one can be found).

This turn of events isn’t surprising. We had commented from the start that no financial institutin would commit, particularly to a novel venture, until they had at least a term sheet, but the organizers have been unable to provide even that. And while the Financial Times says that the group hopes to start organizing a bank syndicate later this week, the initiative is already behind schedule when time is of the essence. Troubled SIVs have started to restructure on their own, and the later this plan comes into being, the less benefit it will provide.

Toward the end, the story mentions worries about the credit quality of Ambac and MBIA. Since they provided credit enhancement to some structured finance deals, if they lost their AAA rating, it would reduce the security of any deals for which they provided guarantees.

From the Financial Times:

The risk of fire sales of mortgage-backed securities was rising on Tuesday after rating downgrades pushed a clutch of complex debt vehicles into default, threatening a further escalation of the turmoil caused by the subprime mortgage meltdown.

The prospect of forced sales comes as a US Treasury-backed plan for a “superfund” to buy up distressed mortgage securities appears to have stalled.

Rating agencies Standard & Poor’s and Moody’s have received default notices for $5bn worth of the vehicles, known as collateralised debt obligations, giving holders of senior debt the right to sell assets.

“The senior controlling class will typically want to get the hell out and pay themselves back, even if that means selling the underlying securities at a discount,” said Arturo Cifuentes, managing director at fixed-income broker RW Pressprich and a former Moody’s analyst.

The threat of forced sales of mortgage-backed assets has prompted the US Treasury to back the proposal by three top US banks to set up for a $75bn superfund to buy securities from cash-strapped structured investment vehicles.

However, the plan has fallen badly behind schedule with no other banks yet making a firm commitment to join Citigroup, Bank of America and JPMorgan Chase.

Executives at other banks believe the plan has been hurt by the turmoil at Citigroup, which lost its chief executive, Chuck Prince, on Sunday after admitting it faced further mortgage-related writedowns of up to $11bn.

“As far as we can see, it appears dead in the water right now,” said one senior Wall Street banker.

However, one person close to the plan said progress had been made on deciding what assets would be eligible and syndication of the back-up bank lines was set to start late next week.

Some observers fear it might now prove impossible to create the superfund quickly enough to help banks deal with the funding problems dogging SIVs – off-balance sheet entities that use short-term debt to fund longer-dated investments.

Expectations are rising that banks might be forced to provide more help to the SIVs they manage in the coming weeks, to prevent a forced sale of their assets.

Citi, which manages SIVs with about $80bn of assets, had bought $7.6bn of commercial paper issued by its SIVs by October 31, out of a total commitment of $10bn, it disclosed in its quarterly filing with regulators….

Mounting investor concern about writedowns of mortgage securities is raising expectations that the Federal Reserve will have to cut interest rates to stop the credit market turmoil from tipping the US economy into a sharp downturn….

Investors also have been worried about the health of US bond insurers, such as MBIA and Ambac, whose central role in the capital markets depends on their high credit ratings.

However, Ambac and MBIA yesterday rose 13 per cent and 7 per cent, respectively, after Ambac and FGIC, another credit insurer, issued statements ­reaffirming their financial strength.

Fitch, the rating agency, warned on Monday that it was reviewing the capital adequacy of the companies to assess whether their AAA ratings were still justified.

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