naked capitalism

Once again, another example of the Wall Street Journal basically printing a press release and calling it a story, as contrasted with the Financial Times, which did some real reporting. The object lesson today is the latest news on the SIV rescue plan, which has retreated from the limelight as the Treasury’s other brainchild, the subprime sham bailout, took center stage.

The Journal’s story is an upbeat progress report: all is well, BlackRock officially signed up on Friday, syndication to start Monday, program to be launched mid-January. No acknowledgment that “mid-January” is yet further slippage in the schedule. To give an idea of the tone of the piece:

The effort to recruit the world’s biggest banks to participate in a massive rescue fund of troubled debt investments is officially kicking off…..

On Monday, syndication activity is expected to go into high gear….

One of the most important features of M-LEC — also known as the super-SIV — is that it strives not to punish SIVs holding particularly large baskets of hard-to-sell assets…..

BlackRock is already surveying credit markets to get a handle on the appetite for the medium-term notes and commercial paper that M-LEC will need to sell in order to raise money for its SIV asset purchases, according to a person familiar with the matter.

BlackRock could profit handsomely from its role in M-LEC. One Goldman Sachs analyst has estimated at least a 5% potential accretion to certain 2008 earnings estimates for BlackRock from its role in the super-SIV. That estimate assumes a 0.3% management fee on a $75 billion fund.

Many challenges lie ahead for BlackRock and the three banks leading the charge. A sense of urgency is mounting to get M-LEC up and running, particularly as credit-ratings agencies continue to downgrade many SIV-related assets.

Contrast this portrayal with a Financial Times article, which found serious opposition to the fee structure. Remember, some SIVs are being liquidated now, and we’ve heard no reports of a crisis. Banks that sponsored large SIVs, like HSBC, are taking them on to their balance sheets and presumably winding them down gradually.

Remember also that the rescue plan vehicle, the MLEC, would buy only the high-quality assets, leaving the SIVs holding the dreck. While the press has been reporting on the falls in SIV net asset values (prevailing levels are below 70%,) that does NOT mean the SIVs’ assets have fallen in value by 30%. The NAV figure measures the fall in the value of medium term notes, a thin slice of subordinated debt. Because the funds are highly geared, you need to divide the fall in NAV by 14 times to get an idea of the fall in the value of the total assets of the SIV. Thus, a fall in NAV of 30% means the SIV’s assets have fallen by a bit over 2%. That gives some context for the discussion below.

Note also that the FT article confirms that the bailout vehicle will use a pricing strategy for the SIV assets that was floated earlier and got a negative response, namely, valuing the assets that go into the MLEC on the prices at which small trades would take place. That was criticized as being a non-market price which would impede getting investors to fund the deal. Commercial paper and particularly medium term note investors are not going to want to buy paper in the MLEC unless they believe the prices for the assets are reasonably close to current market levels or there is considerable credit enhancement, which would be costly. We have repeatedly said it wasn’t clear at all whether the desires of the SIV sponsors and the investors who will be asked to fund the deal could be reconciled, and this still appears to be an open question.

From the Financial Times:

The fees being proposed by the planned superfund for structured investment vehicles (SIVs) are too high for it to be workable, according to some of the vehicles it has targeted.

The fund, being put together by the top three US banks with the backing of the US Treasury, intends to charge heavy upfront fees to SIVs in addition to an 8 per cent “haircut” on asset sales into the fund.

Some SIVs have said that the costs are too high for them to be interested. “It will be painful for the SIVs and there have been a lot of complaints,” said one person close to the process. But some of this appeared to be normal negotiating tactics, he added….

The upfront fees will be paid to the banks providing liquidity backstops for the fund…..

To protect the banks from credit risk, the fund will pay only 92 per cent of the price of a SIV’s assets in cash. The rest will take the form of notes, redeemable if there are no defaults on the assets….

It will determine the market price for a small trade in a particular asset, which the SIV will get regardless of the volume it is selling.

The banks had originally talked about raising $75bn for the fund but the potential demand from SIVs is decreasing as some managers seek other solutions to their funding problems….

Some critics of the plan saw it as a way to bail out Citigroup, which manages SIVs with $66bn of assets. However, it is not certain that Citi will make use of the fund.