Re: Government Code Sections 16429.1, 53601, 53601.6, 53601.7, 53601.8, 53635, 53635.2, 53638, and 53684 include a number of requirements on how and where public money may be invested. Figures 1 and 2 provide a synopsis of the permitted securities and conditions for using them. Prohibited investments include securities not listed in Figures 1 and 2, as well as inverse floaters, range notes, interest only strips derived from a pool of mortgages, and any security that could result in zero interest accrual2if held to maturity, as specified in Section 53601.6. Consensus recommendation: Include the list of permissible securities in the investment policy,and modify the list to meet the unique needs of the local agency. These modifications may include additional restrictions on the type and amount of specific authorized investments to reflect the risk tolerance of the agency.

e. No more than 30 percent of the agency’s money may be in Bankers’ Acceptances of any one commercialbank. f. “Select Agencies” are defined as a “city, a district, or other local agency that do[es] not pool money indeposits or investment with other local agencies, other than local agencies that have the same governing body.”g. No more than 10 percent of agency’s money may be invested in any one issuer’s commercial paper. h. Issuing corporation must be organized and operating with the U.S. and have assets in excess of$500,000,000.i. “Other Agencies” are counties, a city and county, or other local agency “that pools money in deposits orinvestments with other local agencies, including local agencies that have the same governing body.” Localagencies that pool exclusively with other local agencies that have the same governing body must adhere to the limits set for “Select Agencies,” above. j. No more than 10 percent of the of the agency’s money may be invested in the Commercial Paper of any one corporate issuer. k. No more than 30 percent of the agency’s total funds may be invested in CDs authorized under Sections53601.8, 53635.8, and 53601 (h) combined.

Here is the HMRC page which promotes this abuse:

http://www.hmrc.gov.uk/manuals/cfmmanual/CFM20030b.htm

So any hard data would be useful.

Thx
John

Top CDO Classes May Lose 80 Percent, Barclays Says (Update1)

By Jody Shenn

Dec. 6 (Bloomberg) — U.S. mortgage assets in collateralized debt obligations have lost so much value that the top classes of the securities may be worth as little as 20 cents on the dollar in a liquidation, Barclays Plc analysts said in a report.

About 20 percent to 30 percent of principal would be covered for the “super senior” portions of mezzanine asset-backed bond CDOs, which mainly contain mortgage bonds and other CDOs initially assigned low investment-grade ratings, Barclays said in the report yesterday. The senior-most classes of CDOs containing highly rated asset-backed bonds would recoup 30 percent to 65 percent, it said.

The details are in The Wall Street Journal. The new Paulson hit on taxpayers would come via legislation that Hank is pushing to allow municipalities to issue more tax-free bonds and use the proceeds to bail out the people who made stupid or greedy bets on real estate with loans they can’t afford anymore.

This is probably the dumbest and most venal of the cavalcade of bailout plans. It’s venal because it would shift the cost of homebuyer and Wall Street greed onto innocent bystanders — us, the people who fund those bonds. It’s dumb because it presumes that municipalities are smart enough to allocate capital intelligently in the mortgage markets.

I would love to hear Hank P. explain to us how local governments will acquire the requisite expertise to assess mortgage risk or values so that they can effectively buy, sell, refinance, and/or insure mortgages.

Keep in mind, this is a job so complex and fraught with risk that it was royally screwed up by a multibillion-dollar industry full of “experts” — that is, until the going got tough and they decided to throw in the towel. There’s no way municipalities can be expected to make good decisions about whom to bail out, or what the right price would be.

Finally, it will introduce the moral hazard that hamstrings real markets by institutionalizing the notion that every Wall Street and Main Street excess should be bailed out by us commoners whenever our elected officials deem it convenient. That is, whenever the press looks too ugly. And don’t be fooled — this is about political posturing in the face of bad press.

As another Journal article explains, the current problem with subprime isn’t really ARM adjustments; it’s that the borrowers couldn’t afford the loans in the first place, even at the teaser rates. Moreover, this problem will continue for years, well beyond “subprime.” There’s plenty of “Alt-A” ARM paper out there that will be resetting until 2010 and beyond.

Funding arrangements for $105 billion of structured investment vehicles (SIVs) were thrown into the spotlight today as Moody’s Investors Service extended its high-profile review of the credit-intensive market after receiving “material information” about possible changes.

The rating agency said it had received fresh details about potential operational changes at SIV issuers, which include some of the most powerful international investment banks.

In a short update circulated this afternoon, the agency suggested that a number of investment banks were working with SIV managers, often hedge funds, on bailout strategies for some of their beleaguered vehicles.

Barclays, HSBC and WestLB have already guaranteed to stand behind their SIVs to prevent emergency sales of assets.

Some $60 billion to $65 billion of the SIVS covered by Moody’s today represent six SIVs arranged by Citigroup. A spokesman denied any suggestion the Wall Street banking giant was restructuring its SIV exposure, stating that its policy remained one of gradualling reducing its assets.

“In some cases, SIV managers are contemplating changes to their management strategies with the objective of reducing market value risk for senior debt investors, while in other cases SIV managers are in the process of implementing restructuring proposals that would provide more protection to senior debt holders,” Moody’s said.

Moody’s said it needed more time to assess the “evolving nature of these wide ranging remedial measures” and the impact of each individual plan.

The agency said it expected to conclude its SIVs review within two weeks, but would update investors following the conclusion of each individual review.

The move came less than a week after Moody’s affirmed, cut or put under review ratings covering about $130 billion of SIV securities, many of which have hit financial crisis after the seizure in credit markets cut off their source of funding.

Moody’s has put 42 per cent of the $300 billion SIVs market under review for possible downgrade.

Today’s Moody’s move came as WestLB, the German banking group, promised to bail out its two SIVs, worth a combined $13.2 billion.

Just weeks after offering an emergency line of credit to its $2.9 billion Kestrel Funding SIV, WestLB agreed within recent days to stand behind its $10.3 billion vehicle, Harrier Finance.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3005352.ece

Rabobank is following HSBC Holdings Plc in London, WestLB AG in Dusseldorf and Hamburg-based HSH Nordbank AG in announcing plans to restructure SIVs. The companies have led a 25 percent reduction in assets to $298 billion, according to Moody’s.

SuperSIV Fund

The banks are pushing ahead with attempts to reorganize ahead of a plan by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. to set up a so-called “SuperSIV” to buy SIV assets. The three banks have scaled back the size of the fund because fewer financial firms are interested in using it, the Wall Street Journal reported today, citing people familiar with the situation.

Tango has reduced assets from 9.7 billion euros through disposals and by selling holdings to creditors, Rabobank said.

The SIV’s net asset value, a measure of what would be left after selling assets and repaying debt, has fallen to 69 percent of capital from 88 percent in September, Moody’s said last week.

SIVs, set up to borrow short-term and invest in longer-dated securities, are having to sell assets and restructure after money market investors including Orange County in California stopped buying their securities.

the SIV business is concentrated in London

Can you point me towards any statistics that substantiate that?

Thx
John