SIV Rescue Plan Appears to be Too Late

One of the many problems we had mentioned from the outset with the proposed SIV rescue plan, the Master Liquidity Enhancement Conduit, was timing. Given that it was a new program that hadn’t even been structured, the proposed 90 day timetable to launch looked unrealistic and even then also appeared to run the risk of coming too late.

Well before 90 days from the mid-October leak, the program’s viability is being trumped by the speed of deterioration of the SIV market. Yesterday, the Financial Times reported that Moody’s and S&P had received default notices on $5 billion worth of SIVs. Today, the Wall Street Journal tells us that Moody’s has issued a report which predicts that SIVs will be liquidating assets, the outcome the MLEC was designed to forestall.

From the Wall Street Journal:

A rescue plan for investment funds that are one source of credit-market concern is under new pressure after Moody’s Investors Service said the funds were liquidating assets to meet financial commitments….

In its report, Moody’s said it had cut, or might cut, ratings of the debt issued by the funds. Moody’s said certain SIVs owned assets with deteriorating values. Some SIVs now could hit financial triggers that would speed up asset sales. Such sales could drag down the prices further, including those of securities to U.S. mortgages, when prices already are low.

Moody’s, in its report, said it now assumes SIVs would be liquidating assets at distressed prices to pay off financial commitments given the problems SIVs face in issuing new debt or refinancing maturing debt.

The breakdown of SIVs is one of a number of concerns paralyzing global credit markets since this summer. In a separate report yesterday, Citigroup said the world’s biggest banks could face write-downs totaling $64 billion because of exposure of securities tied to subprime loans.

The Moody’s moves yesterday will put more pressure on the banks behind the plan, first announced last month, to form a supersize fund to buy some assets from the SIVs. Without the fund in place to purchase assets from the SIVs, they will be more likely to begin selling off assets at whatever prices they can get to raise money for payments they need to meet to investors who have purchased their commercial paper.

“They are going to have to sell at some point,” said Douglas Long, an executive vice president at London-based Principia Partners, which provides technology support for structured-product managers. “It’s not looking pretty.”

Yesterday, Moody’s downgraded, or said might downgrade, debt issued by 16 SIVs. The ratings agency cited the deteriorating value of the assets in the SIVs, which hold $33 billion worth of debt securities.

The SIV market is made up of about 30 funds that own some $300 billion in assets. Investors stopped buying debt issued by SIVs earlier this year; they worried that the SIVs could hold assets linked to subprime mortgages and thus could have trouble repaying debt.

Moody’s said it wasn’t taking the ratings actions because of the quality of the assets in the SIVs. Instead, Moody’s said the SIVs problems stemmed from the drop in the market value of the assets the SIVs own as investors shun those investments amid the credit crunch.