On Friday, a Reuters story reported, ultimately based on a statement by Treasury Secretary Henry Paulson, that bond giant Pimco has decided to join the SIV bailout plan. The news seemed odd at the time, since Pimco’s co-chief Bill Gross had labeled the plan as “lame” and Pimco has just about zero presence in the money markets. However, his newly installed co-president Mohamed El-Erian, had been more positive, so it wasn’t completely outside the realm of possibility.
For the record, here is the relevant bit of the Reuters story:
Fund giants PIMCO and Fidelity have joined the so-called super SIV fund set up by three big U.S. banks, boosting confidence in the plan, Bank of Italy Governor Mario Draghi said at the close of a meeting of finance officials from the Group of Seven rich industrialized nations.
“Paulson has done a short briefing on the SIV fund,” Draghi told journalists. “PIMCO and Fidelity have joined.”
But MarketWatch today reports that Pimco is most assuredly not in:
….a spokesman for PIMCO said Draghi was incorrect.
“PIMCO is not participating,” PIMCO spokesman Mark Porterfield said in an email on Saturday.
We said yesterday that the sponsors appeared to be exaggerating the level of commitment to the fund, but to have this emanating from Paulson is stunning.
It gets even better. Reuters also indicated that Paulson was going to buttonhole Deutsche Bank president Josef Ackermann about supporting the fund during some meetings held by the Institute for International Finance in concert with the G-7 sessions over the weekend, despite the fact that Deutsche was widely reported to be cool on the idea.
This gambit appears to have misfired spectacularly. Perhaps to avoid the awkwardness of telling Paulson no directly, Ackermann speaking on behalf of the 31 member board of the Institute for International Finance said that no one could sign up until they knew what the deal was. From Bloomberg:
It’s “premature to make a firm judgment as not all the details are yet known to us or are fully announced,” said Deutsche Bank Chief Executive Officer Josef Ackermann, speaking on behalf of the 31-member board of the finance institute at a press conference in Washington today.
We’ve noted before that to ask institutions make commitments, particularly to a novel structure, without having at the very least an outline of key terms is pretty much unheard of. Paulson of all people should know this full well. Yet he has seemed bizarrely intent on proceeding in a “fire, aim, ready” fashion. The Financial Times picked up on this theme:
Most international bankers gathered in Washington at the weekend were agreed on one thing. It was too early to say whether the planned $75bn mortgage securities fund would work or whether they would back it…..
Stephen Green, HSBC’s chairman, said on Sunday that some details still had to be worked out. HSBC would consider whether to participate if and when it was formally approached.
Bob Diamond, president of Barclays, said the bank was open-minded. “If it’s the right structure, the right spirit and the right constructive solution, with appropriate pricing, we would be prepared to do something.”
But some bankers appear to have decided. “Although we don’t have many details at this stage we do not expect to take part in the initiative,” said Alessandro Profumo, head of UniCredit.
The head of another European bank said: “We doubt this is the right approach.” The lack of enthusiasm among many European banks is shared by many officials. It was “not obvious” that the fund would help address problems in the asset-backed commercial paper market, a leading G7 official told the FT.
Ackermann also pointed to the big dead body in the room, namely, how the assets that went into the new vehicle, the so-called Master Liquidity Enhancement Conduit, would be priced. We’ve suggested that it might not be possible to come up with prices that make both the sellers, the SIV owners who don’t want to take a bath, and the investors, who don’t want to overpay, both happy. The Financial Times reported that pricing has emerged as a point of contention:
One key concern is over the process by which it is proposed that the fund will decide on prices to offer SIVs for their securities. The lead banks are proposing that prices should be determined according to quotes provided by dealers for small volumes of the particular security rather than large trades. Critics say this means prices will be artificially high. “Banks are being asked to finance a vehicle full of overvalued assets which is not very attractive,” said one banker. Critics believe it would be better to work with true market prices – however painful.
So the truth has come out. The intent for the SIV rescue plan, not surprisingly, was to prevent (or at least forestall) the recognition of losses, in the misguided hope that the market would recover, or that the losses could be spread out. But in this newly cautious market, investors will have none of that.
Ackermann couched this problem as a broader issue of transparency: for investors to have confidence that the MLEC isn’t some sort of shell game, they have to know what the prices of the assets are. I am not certain any of the sponsors had any intention of providing that information. But Ackermann is assuredly correct on this issue. From Bloomberg:
To succeed in restoring investor confidence, the plan would have to provide “transparency” to the prices of financial assets, Ackermann said…..
While “we welcome market initiatives aimed at accelerating the restoration of confidence and liquidity in money and credit markets,” Ackermann said, “it’s very important to create the transparency which is needed to restore confidence.”
Interestingly, HSBC’s chairman Stephen Green said his bank had not been asked to join, and also indicated that its SIVs had manageable risks.
Now technically, this move is a demur rather than a no, but consider: the experts on cognitive bias at Overcoming Bias report that people don’t change their minds very often, and do so less often than they believe. Research has also found a tendency to adhere to preliminary judgments.
We’ll see soon if what hold true for individuals also applies to organizations.