The Smoke and Mirrors SIV Rescue Plan

Although the details of the planned SIV rescue program, the so called Master Liquidity Enhancement Conduit (MLEC) have yet to be announced, enough has been leaked to allow us to speculate with slightly greater confidence.

Since this whole enterprise has a hall of mirrors quality to it, in the spirit of Lewis Carroll, we’ll start with sentence first, verdict afterward, or in this case, bottom line first, assessment afterward.

Yesterday, we voiced doubts that this program could get done. Now that we understand that the primary goals is legerdemain, we think that it is likely that some sort of entity will be put into existence, funded, and labeled a success no matter how short it falls of its initial target. Whether that initiative will be seen as an arm’s length, legitimate undertaking is very much in question. And there is a real risk of a Northern Rock effect.

Recall that what precipitated the run on UK building society Northern Rock was the revelation that it was in discussions with regulators about its deteriorating state. Before that, few outside the banking community were aware of its distress. Similarly, there has been very little coverage in the US financial media of the rocky state of the commercial paper market and Citibank’s exposure to it. Revealing those facts, without having a rescue plan firmly in place, may do the exact opposite of what the program is intended to do, namely weaken confidence rather than shore it up.

Now to the details, or lack thereof. As we suspected, this program, which is sounds as if has been designed mainly among the Treasury, Citigroup, and agents JP Morgan and Bank of America (with limited input by unnamed others) is not far beyond the high concept stage. The speculation at the New York Times, the Wall Street Journal, the Financial Times, and Bloomberg is that it will be announced today with the expectation that it will be up and running (which we assume means having closed) within 90 days. But the worrisome acknowledgment in the Times that many details need to be sorted out says a great deal needs to be negotiated with intended participants. both the other banks with SIVs and prospective investors.

That seems awfully ambitious for a new structure. My guess is the reason for going public without having a structure in place is that the working group had gone as far as it could without the press getting wind of it (as they did anyhow) so they had either decided or were forced to make a virtue out of necessity.

But is isn’t clear that this unrealistic, um, ambitious timetable is fast enough to solve the problem. The Journal in its article points out how heavily Citi is exposed to SIVs, with $100 billion out of a global market of $400 billion while also being more thinly capitalized than other big banks; the Journal’s Deal Blog raises the obvious question: is this a bailout for Citigroup? As the first page Journal story notes:

Citigroup took the lead in pushing for the rescue plan. Large sums of SIV debt were coming due in November. And increasingly debt analysts were forecasting a tough future for SIVs. A Citigroup research report, issued two days before the banks and Treasury met for the first time, noted, “SIVs now find themselves in the eye of the storm.”

On my calendar, November is a lot less than 90 days away. Admittedly, Citi can provide funding for however many days and weeks until the conduit is functioning, but it seems highly unlikely that this entity will be up and running before Citi starts feeling squeezed.

And that is still assuming the formation of this entity really solves the problem it is meant to solve, meaning, first, giving some liquidity to Citi, and second, restoring confidence in the SIV market. I have doubts on both counts.

To make this entity look like something other than what it is, namely Citi merely creating another SIV and perhaps seeking longer maturity funding (the Journal indicated the MLEC would last only a year, which seemed implausible, while the New York Times indicated it would have a longer life and seek mainly commercial paper funding) requires the participation of other banks. But the fund, as least as envisioned now, has a feature that other banks may find offensive: Citi will take fees out of it.

The Journal indicated that Citi, JP Morgan, and BofA will be paid for providing a credit backstop. If Citi is providing most of the assets to the MLEC, this merely looks less than arm’s length. Regardless, banks of comparable or better credit quality than Citi may argue against paying those fees. The three banks will also take placement fees for arranging the funding and one presumes they will share a management fee.

The New York Times has said the banks are drawing up guidelines for what assets will eligible for the MLEC. If Citi has a is involved in determining what assets from other banks’ SIVs go into the MLEC, the prospective participants could object, since Citi is a competitor in that market and might get some insight into their holdings.

That takes us to the problem of the assets that will go into the MLEC. As the New York Times tells us:

To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings — AAA and AA — and debt that is backed by other mortgages, credit card receipts and other assets.

Huh? The market is objecting to the crappy assets in the SIVs, not the better quality ones. It would seem more logical to take the lousy assets, issue a guarantee, and seek funding for them, and let the banks keep the good assets in existing SIVs, which ought to be marketable once the dodgy assets are excised. The banks are on the hook for the SIVs, anyhow, since they are having to fund the SIVs via backup credit lines, so any mechanism that enables them to get third party funding advances the ball.

Experts are already deeming the MLEC as currently described to less than a substantive measure. From the New York Times:

One analyst, Christian Stracke of the research firm CreditSights, said the effort appears to be an attempt to soothe tense investors in the debt market, rather than to provide substantive relief to the worst-hit mortgage securities. He noted that many of the banks participating in the fund had already been working on their own to ease problems at SIVs.

“For me, this is more of a P.R. blitz,” he said. The banks are “saying, it’s not just that we are doing this on an ad hoc, individual basis. Rather, we have a plan and consortium in cooperation with Treasury, which gives it a veneer of respectability.”

Stracke seems to be the preferred source on this topic. HIs comments to Bloomberg:

“This is mostly symbolic,” said Christian Stracke, a London-based strategist at CreditSights Inc., a New York bond research firm. “The banks were going to need to inject more liquidity into the SIVs anyway, so the public co-operation just makes the bail-outs of SIVs seem more orderly.”

And others question even if the program works, whether it will be adequate. Again from Bloomberg:

Alex Roever, a debt strategist at JPMorgan in New York who wasn’t involved in the negotiations, estimates that SIVs have at least $320 billion in assets.

“Eighty billion is great, but it’s not that big a number,” said Roever. “It still leaves you with $240 billion. That’s a lot of dough. There may be enough money to pay the senior debt holders, but it’s not enough to pay off everyone else.”

The Journal also noted in passing that banks may not participate because the markets could see the use of the MLEC as an admission that they are worried about liquidity. That isn’t a trivial issue, as the reluctance to use the discount window shows.

But we’ve held off the biggest problem for the last. How are they going to price the paper? Even if all the other reservations prove to be groundless, the plan could founder on this issue alone.

Transfers of assets to the MLEC must be done at a specified price. I doubt if any third parties are going to be be willing to extend funding to the MLEC if they believe the assets are being priced above market. Yet any current market pricing, even for high quality assets, is likely to require the SIV to book a loss. Even if the SIV owners accept the general premise that their paper has to be sold at a discount, they may still not like the prices on offer from the MLEC. And if the very best paper in the SIV is sold at a loss, that says the crappy paper has to be written down. As Gillian Tett at the Financial Times noted:

One banker said last week: “The banks have varied enormously in terms of how much they have marked down their books – of course there are some that want to avoid the big write-downs.

The SIV owners may decide to fund the SIV themselves and sell later, particularly if they believe the Fed will cut rates down the road, rather than book losses that they may believe (correctly or not) are too high.

Perhaps I am too pessimistic, but the lack of a functioning trading market for many of the assets in these SIVs is what made this mess so intractable in their first place. If you had market prices, you could get valuations from neutral, credible parties for the contents of SIVs. That would have gone a very long way in calming CP investors’ frazzled nerves. All these machinations by Citi et al. look like a very convoluted attempt at a finesse. Am I the only one who suspects the emperor has no clothes?

So why, with all the foregoing, do I believe this program will get done? Answer: because the Treasury has put its prestige at stake. The principals will do everything in their power to make this truly terrible precedent stick. The Treasury has become deeply involved in assisting a private concern at no evident risk of failure rather than let it take its lumps (by contrast, the Fed did relatively little in the LTCM bailout beyond convene a meeting and tell everyone it would behoove them to sort the matter out). The key actors want this to be a happy experience for Uncle Hank so they can come back for more.

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  1. a

    Don’t know, I don’t really object to Treasury getting involved per se. It is, after all, supposed to have a certain responsability to the economy. And its involvement seems limited to jawboning; no public money is involved. I’d contrast this with Rubin’s do-nothing approach when Greenspan uttered his famous “irrational exuberance” remarks. It seems to me that if Rubin had come to Greenspan’s assistance, rather than letting him twist in the wind when Congress shafted him, the U.S. economy might be in much better shape today.

    With that said, I agree that there is a big question whether this was a wise thing to do. It certainly, as you point out, raises questions about Citibank, which few were really thinking about up to now. Who’s going to buy CP issued by its SIVs now, once the best CDOs are hived off?

  2. Anonymous

    Excellent analysis Yves.

    This is the most thorough analysis of the Super-SIV plan that I’ve seen on the Internet. Very impressive. You sound like you used to work on Wall Street.

    The valuation of SIV assets certainly seems very problematic, as well as the idea of buying the best SIV assets (what’s the point of leaving the bad assets in the SIVs?).

    A key fact that I focused on from the WSJ excerpt was:

    “Large sums of SIV debt were coming due in November.”

    Does this mean we might anticipate big trouble in the ABS markets come November due to SIV forced liquidation?


  3. Scurvon

    Combining factoids:

    * Size of Super SIV appears to match size of Citi’s SIVs;
    * One year expected life;
    * ABCP coming due in November.

    Is it possible this is all about an orderly liquidation of Citi’s SIVs?

  4. Yves Smith

    a and Bernard,

    The WSJ Deal Journal wondered whether this was a Citi bailout, and it may well turn out to be that. While there is a desire to have this facility serve other banks as well, it isn’t clear how much of the total size was implicitly allocated to them. And since they haven’t weighed in (much? at all?), it isn’t clear whether they will like the design.

    Another curious feature is the comment on Citi having a lot of SIV paper maturing in Novermber. There was worry that there was also a lot of ABCP maturing in September, yet we got through that (admittedly with the market shrinking). Again, if the concern was the broader market, one would think that might have been mentioned by the sources (ie, this facility was to help any banks that had extended funding to their SIVS and therefore had reduced their ability to lend for other purposed).

    And therefore, reader a, this is why I see this move as a bad precedent. This looks like being about Citi and only peripherally about helping other banks. Fine if it does, but it doesn’t appear that much effort has been expended on behalf of other banks.

    In addition, despite its claims otherwise, the Treasury clearly has been heavily involved. This is without precedent. Even in LTCM, which had the potential to produce a systemic crisis, the Fed was comparatively hands off.

    While I agree it would have been better had Rubin said something in support of Greenspan’s “irrational exuberance” remark, that’s completely different than working actively with private sector parties to design a program on which they will earn fees. If this was all about rescuing the market, you think they might set the tone by waiving fees, or perhaps basing them somehow on the successful management of the MLEC.

    And yes, Bernard, I did work on Wall Street.

  5. CurmudgeonlyTroll

    How were the banks able to keep the SIVs off balance sheet under post-Enron rules?

    If the SIV is off-balance sheet, who was earning the profit and taking the equity risk, thus left holding the bag? And if the banks are on the hook, how was it kept off balance sheet in the first place?

    My naive understanding is that, post-Enron, in order to be off balance sheet, the entity must have sufficient equity to be independent and self-financing (and if sponsor owns > 50% equity it would have to be on balance sheet), or the sponsor must have neither control, nor right to profits, nor obligation to absorb losses (which clearly seems not to be the case).

    Bottom line, it seems these banks are on the hook for a bunch of crap which is not on their books. And even much of what is on their books is marked to myth. So exactly WTF do their reported earnings and ratios mean? Squat.

    For all the whining about SOX, little seems to have changed since Enron. Although the law has more teeth, so more and bigger fish may end up in jail this time.

  6. Anonymous


    A big problem with this credit system is that these banks have provided a huge amount of credit lines as a backstop for all that ABCP (if they can’t rollover their debt). It is estimated to be $900 billion in credit lines.

    However, my understanding is that were not required to set aside equity capital by our banking regulators in case they were called upon by the ABCP issuers to provide the credit line funding. Essentially these are contingent assets/liabilities.

    The great thing about these SIVs for the banks was that they could reap the carry trade spread on very large sums borrowed and then lent out, while putting up little or no capital of there own to generate these profits. The ABCP buyers would take all of the hit if the underlying assets (MBS, CDS, etc.) went down the toilet.

    I still find it unbelievable that there could be so many professional money managers that looked at this ABCP as if it was “money”, when the ABCP was being used essentially for carry trade (with duration mismatch between assets and liabilities). As long as those credit rating agencies would stamp it with AAA, that’s all that they cared to look at before dumping the money in.

    How can any ABCP be rated AAA if the repayment at maturity depends on the issuer being able to constantly refinance the debt by issuing new debt?

    If I’m not mistaken, there is still a ton of ABCP sitting out there with AAA ratings. These credit rating agencies are a joke.


  7. a

    “This looks like being about Citi and only peripherally about helping other banks.”

    I haven’t seen enough details to be able to comment on this.

    “that’s completely different than working actively with private sector parties to design a program on which they will earn fees…”

    Well that strikes me a bit as being shocked that there’s gambling going on at Rick’s. Even the LTCM hedgies, who had done their damned best to blow up the system, didn’t work for free once they were taken over. Or am I missing something?

    By the way, I think over-all your analysis is excellent. I just like quibbling along the margins.

  8. Anonymous


    Perhaps as you say, a big motive for this SIV plan is to prevent the $100 billion in ABCP that Citigroup backstopped from going onto their balance sheet.

    If SIVs engage in large forced liquidations in the ABS market, this will in turn send the ABCP buyers for the exits (since the ABCP is backed by the ABS) and this time the ABCP probably won’t roll over (like they managed to pull off in September after they shortened the term to maturity down to as little as overnight rollover).

    If the $100 billion goes onto their balance sheet, that means that Citigroup alone will have to curtail their lending to everybody else by at least $100 billion (massive credit crunch).


  9. Lawrence D. Loeb

    The last comment seems to be closest to the mark.

    From what has been reported (since that is the extent of our knowledge at this point) M-LEC has a very limited purpose. It is not intended to fix the MBS, CDO, CLO, etc. markets. The purpose would seem to be two-fold:

    1. Improve liquidity in the asset-backed commercial paper market; and

    2. Free up bank reserves for new loans.

    The SIVs are non-recourse vehicles. The banks have no actual obligation to take the assets onto their books (although they do provide back-up credit lines). There is, however, the risk of damaging relationships with customers and hurting bank reputations if they allow the SIVs to liquidate.

    This problem arises because the SIVs relied on short-term paper to fund their investments. Uncertainty related to SIV assets has led to lack of demand in the commercial paper market and the sale of $75 billion in SIV assets.

    If the SIVs are unable to fund themselves in the commercial paper market, they will be forced to liquidate – creating fire sale prices on assets.

    These low sale prices will not only hit investors in the SIVs, but will cascade through the system as other holders of the same securities are forced to mark their investments to the distressed sale prices (leading to other liquidations, particularly from leveraged funds).

    The alternative to liquidation is for the banks to wind up the SIVs and take the assets on their balance sheets, tying up reserves and limiting their ability to lend.

    If successful, M-LEC will provide greater credibility to the SIVs (as commercial paper will be backed by SIV assets AND bank guarantees). This will free up reserves and limit the collateral damage.

    It is a bit more than optics.

    Yes, I also worked on Wall Street.

    I have commented further on this on my blog at

  10. CurmudgeonlyTroll

    Thanks for the reply anonymous…

    The banks are only at risk for the backstop credit?

    If the bank doesn’t own the SIV equity, who does (and is presumably wiped out if the collateral has to get liquidated)?

    So the banks took the interest rate and credit risk (modulo the apparently inadequate equity cushion), solely for fees, and didn’t participate in the upside? If it’s just a margin call on a spectacularly ill-advised client, the equity-holder, who’s the client?

  11. Yves Smith


    Let me give you some of the reasons I differ with you on this one:

    1. The MLEC will be cherry picking the best assets. This leaves Citi and others still on the hook for the lousy asset (lower rated subprime related, etc.). Similarly, the size of the conduit has been reported at at most $100 billion (and it has been clearly stated that the size depends on how many banks show up), when the size of the SIV market is $400 billion. This would seem to have the effect of tainting the other $300+ billion as not being good enough for the conduit. How helpful is that?

    2. Given that money market investors are in the business of taking no risk, I’m not certain how they will regard the MLEC. As you know, many are constrained by $1 NAV rules. I’m surprised, as I mentioned before, that the organizers aren’t securing longer maturity funding. Even investors in the 1-3 year note market have slightly more appetite for risk.

    3. If this really was a bona fide effort to solve the SIV problem (or rather keep their contents off the market), I’d expect to see a structure more like: put all the SIV assets in a new entity, have a consortium of banks, including uninvolved banks like JPM and BofA, give guarantees (only the new banks take fees for the guarantee; the others guarantee pro rata according to their participation). That keeps the stuff of the balance sheet, with no net increase in risk (the banks have all pretty much acting like they are guaranteeing the risk).

    4. 1 & 2 presupposes this deal gets done on a reasonably large scale basis. But given the considerable obstacles with determining what an appropriate price for the assets is, there is a very real possibility that you will see the assets coming almost entirely from Citi and maybe a few banks who have been arm wrestled to put a few assets in to make the MLEC look more legitimate.

    The dead body in the room here is that some of the assets in the SIVs are worth less than when the SIVs started issuing CP. That’s why CP investors won’t touch it: lack of transparency and inability to assess who if anyone has clean assets.

    Money market investors don’t make big margins. Even if the info were available, they don’t have the resources or inclination to do complicated analyses. There is paper that is less problematic for them to hold, so they will buy that.

    In the end, there has to be price discovery of this paper, If there was a way to facilitate orderly price discovery (not sure how that could be done, BTW) that would be helpful. But the losses in this stuff may be large enough that holders will recognize losses only when they have to. It may be that a distressed sale scenario is unavoidable. The only trick then is how to attenuate it, how to orchestrate things so those sales are spread out over time.

  12. Anonymous

    Are the banks issuing their own commercial paper to fund the conduit? If the banks are issuing their own commercial paper, then presumably the commercial paper will only go bad if the banks themselves go bad. If so, then why should investors care about what is in the fund? It’s the banks’ commercial paper, after all.


  13. Yves Smith


    On your 11:42 AM comment, where one comes out on the Treasury’s role depends on one’s view of the job of regulators. Reasonable people can differ here.

    The problem is that regulators have conflicting objectives: they are supposed to ride herd on them, yet preserve their health. We’ve seen with the FDA how an agency can be co-opted.

    Unfortunately, as various commentators have noted, the financial services industry has engaged in such a sizable expansion of credit that there is a real risk that deleveraging could create a sharp fall in asset values (the value of many of these assets need to return to earth somehow, but the trajectory of the decline will make a difference). Regulators have shown they will intervene to prevent a collapse. So the unfortunate side effect is all these financial services players will have made profits in the good days and socialized the losses in the bad ones.

    That’s why I think greater regulation is warranted. If banks and other financial services firms are ultimately wards of the state, they need to be kept on a shorter leash.

    As for the Treasury’s actions, they have involved too few players for this to look like a solution aimed at SIVs generally, regardless of their intent. The FSA or the ECB should have been consulted at an early stage, rather than immediately prior to an announcement. And by getting so deeply involved, they risk their credibility and clout.

    If you read Roger Lowenstein’s When Genius Failed on LTCM, its creditors were stunned to learn that the Fed had summoned them to a meeting. The fact that it was such an unheard of move was a very powerful signal. And the Fed was in no way responsible for the success of the outcome, although it clearly hoped a solution could be devised.

    The Treasury is debasing its and the Fed’s currency by playing such a prominent role.

  14. Ken Houghton

    It looks like a great s/c/a/m/ idea.

    (1) “Sell” the good paper to the SIV. This is least likely to be discounted and now provides a “real” market transaction.

    (2) Mark the remainder of the market (de facto not HFS, so it can be carried at “book”) against the known prices of the best assets.

    If you try doing it your–admittedly more rational–way (i.e., put the riskier assets in the SIV), one of three things happens: (a) you get real market values that scare the investors, (b) you produce pricing no one really believes and still scare a chunk of investors, or (c) you have no chance to take gains on the dicier paper if there is an opportunity to sell it when (a) and (b) don’t happen.

    As structured, it’s a free finesse with some upside. Jimmy Cayne would play that hand. (Warren Spector would win it.)

  15. Ken Houghton

    Yves: “As for the Treasury’s actions, they have involved too few players for this to look like a solution aimed at SIVs generally, regardless of their intent. The FSA or the ECB should have been consulted at an early stage, rather than immediately prior to an announcement. And by getting so deeply involved, they risk their credibility and clout.”

    Spot on, that. But does it surprise you, given which fox is running the Treasury henhouse?

  16. Yves Smith


    Thanks for your comments. Perhaps I am naive, but I guess I don’t see how the values used for AAA and AA instruments with no subprime can be used as much of a basis for setting values for the really doggy stuff. But you are right that if they can do it (or the SEC decides to turn a blind eye), they will have pulled a fast one. That may indeed be what this structure is intended to achieve.

    As for the much simpler idea I mentioned, it wasn’t about valuing the assets. If the banks are willing to take this stuff onto their balance sheets, they’d be better off putting it in yet another vehicle and guaranteeing the paper. I am pretty sure the latter approach takes less capital, and the use of a consortium to do so (properly structured, and with uninvolved third parties providing credit support too) ought to enable it to be deemed to be off balance sheet again.

    So all my simple-minded outline was intended to do was to keep the assets in the SIVs off balance sheet, but shore up its creditworthiness by making the guarantee that the banks now realize that they have unwittingly made explicit.

  17. Anonymous

    Through this MLEC purchase program, the SIVs will be selling $100 billion of their highest quality ABS assets to the banks. This will allow the SIVs to repay $100 billion in ABCP that was backed by those ABS assets. The valuation of the assets sold may not be an issue because these are higher-quality, more-liquid assets.

    However, this still leaves $200 billion in riskier ABS assets with $200 billion in ABCP that will eventually come due. May I ask what do they do later when that ABCP needs to be rolled over?

    Beyond this, even with this MLEC program, the banks will still have to set aside $100 billion in funds to buy these assets, which will come right out of the hide of other borrowers (meaning: credit contraction).

    Looks like this plan only buys a little time (and not much at that given the short-term maturities on ABCP). And it might lessen the SIV forced liquidations by one-third, since the SIV assets are reduced by that proportion ($100b/$300b) and transferred to the banks who wouldn’t be forced to sell.

    I think this is still re-arranging the chairs on the Titanic. What drives everything is the underlying deterioration in MBS values, which will be fundamentally driven by the deflating US real estate market (causing mortgage defaults as homeowner equity evaporates in conjunction with mortgage rate resets). Eventually, the investment banks and hedge funds will be forced to mark-to-market most of their massive MBS/CDO/CDS holdings (no more Level 2/3 accounting BS), and when they do, many of them will be deemed insolvent and the game will be over.


  18. Anonymous


    Yves would probably address your question better than me (given my limited knowledge of SIVs).

    If I’m not mistaken, the “beauty” of the SIV structure for the banks is that they invest little or no capital into the SIV and reap 100% of the equity (and 100% of the profit on the SIV carry trade). The financing of the SIV is almost pure debt (and no equity)—meaning tremendous leverage and tremendous return on equity invested.

    If the SIV assets fall in value, the banks don’t take a hit because they hardly invested anything anyway. The ones left holding the bag are the ABCP debt-holders.


  19. Anonymous

    The master SIV plan seems like nothing more than a way for investors and bank sponsors to minimize their losses.

    If they wait until a liquidation of assets, which will be forced if enough CP runs off or marks on the assets decline further, prices will be low and losses large.

    This plan lets them move the good assets into a new structue (which presumably can be funded by investors at reasonable prices) and leaves the bad assets with the junior investors of the original SIVs. The junior investors are happy to do this because if they do nothing, they will be wiped out by the current market prices of the bad assets. This gives them an opportunity to reduce losses. The senior investors are happy to run away without losing anything. And of course by finding new money for the good assets, the banks keep all of this off of their balance sheet.

    The hard part will be negotiating the price that the old SIV sells the good assets to the new SIV. It is a game of chicken between junior investors who are scraping for every dollar, senior CP investors who want to run, and banks who want the whole thing to go away. It will get done becuase it is in everyone’s interst for it to happen.

  20. Yves Smith

    As of September 29, according to Bloomberg, the commercial paper market had already contracted by $368 billion, of 17%, over seven weeks (it rebounded by under $2 billion last week, which may just be noise). Roughly half the CP outstanding before the shrinkage started was ABCP, and it is generally understood that investors are refusing to buy only ABCP. So that means the ABCP market has already shrunk by a third, yet we’ve seen no distress or forced liquidations.

    So are the banks crying wolf, or is Citi in worse shape than the other banks, or would any further contraction be the straw that broke the camel’s back? Hard to tell, but the lack of any visible distress heretofore seems inconsistent with the launch of this program.

  21. Juan


    You said: “The Treasury is debasing its and the Fed’s currency by playing such a prominent role.”

    While I have no expectation that rating agencies would do this, I do wonder about potential for de facto downgrading of Treasury debt.

    The whole situation seems to have a tonality of later 1990s Japan.

  22. Yves Smith


    In context, I meant their currency in terms of moral authority and clout with the institutions they regulate. The more they respond when the financial services industry has a sniffle, the less power they have. They become less effective in calling for action in a real crisis.

    But it is separately fair to observe that the dollar and US Treasuries may not be the rock solid standard that they are now. We noted yesterday that the Treasury is likely to increase its bill, note, and bond auctions by 50% in the upcoming year. In the 1970s, the Treasury bond’s standing was relatively untarnished by sustained inflation because many other industrialized nations were suffering similar pain, and there was no alternative to the dollar as reserve currency. The Euro is becoming an increasingly viable option. As the Eurobond market becomes more and more liquid, the Treasury’s standing as the preferred place to stash excess cash may suffer.

  23. Juan


    Thank you for the response but context was understood. I was not so clearly relating to Japan’s earlier banking crisis which, as you know, included quite a bit of MOF and BOJ involvement and actual downgrades of govt bonds.

    Certainly no perfect analogy w/Treasury and Fed yet the tune is reminiscent.

    Agree completely with your implicit referral to weakening, possible endings, of dollar hegemony.


  24. Yves Smith


    The press has given mixed signals about the amount of credit support. The early reports made it sound as if The Entity would be guaranteed; later reports backed away from that.

    But one would have to think that the whole point of this exercise is to lower the capital required by Citi et al. Otherwise, why bother? But one fallacy seems to be that hiving off the better assets suggests that the rest are hopeless. I’m not certain that is a net gain.

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