SIV Rescue Plan Reported to Choose BlackRock as Manager

A reader chided me for being late to this story, but it appears not to have been widely covered yet. Moreover, I would hazard that it means less than the out-of-character reporting in the Financial Times suggests (this “leak” is a PR plant).

First, the FT article:

BlackRock, the asset manager 49 per cent owned by Merrill Lynch, is set to be signed up as the manager of the $75bn superfund being put together by the top three US banks.

The appointment of BlackRock, one of the world’s leading bond managers, is seen as an important vote of confidence in the plan, which met with initial scepticism from some banks and investors.

Larry Fink, BlackRock’s chief executive, has become a strong advocate of the plan and his team gave by far the best pitch for the business, according to a person close to the process….

The plan was leaked five weeks ago, when it was still at a very early stage, leaving it vulnerable to critics who complained that key details had not been worked out. But there has been growing support for the proposal since the banks – Citigroup, Bank of America and JPMorgan Chase – agreed to important changes 10 days ago.

These included raising the fees for selling to the fund to up to 1 per cent of assets. This will allow the fund to pay more to the banks that will provide back-up liquidity and to the managers..

The appointment of BlackRock should increase confidence that the prices the fund pays for SIV assets will be set independently of the banks, people close to the plan said…

The lead banks are expected to start syndicating the bank facilities in the first week of December and the fund could be up and running by early January.

Why is BlackRock’s participation is a “vote of confidence” in the fund? What the “manager” job entails is unclear (the fund is a new construct; the role will be defined contractually; it could therefore cover a multitude of sins) but the article indicates that BlackRock will have a role in pricing the assets purchased for the fund. The article also implies that there was a beauty contest for this role, meaning this is a fees for services job.

I don’t see signing up to earn fees as a “vote of confidence.” The only developments that would impress me are the kind that involve institutions putting up hard cash or financial commitments.

From BlackRock’s perspective, this is a no-brainer. If the fund is reasonably successful (however measured), they share in the glory and the fees. If it isn’t, all they did was waste a bit of time (and look, they still got favorable press profile, so it will not have been a total loss). This is a novel structure and they had no role in designing it. They have no reputational downside (unless they handle the role in a way that tarnishes their name, say by trying to legitimate above-market prices for the new entity’s assets).

No matter how many fancy names are associated with this enterprise, there are still some diffcult hurdles. One is how you price the assets to be transferred from existing SIVs to the new entity. Sellers want to minimize losses; investors are not willing to fund assets priced above market (however that is determined). Can a price be found that will satisfy both parties, or is this a fundamental out-trade?

In addition, I am now wondering who, exactly, will purchase the commercial paper that will fund this new entity. While this is anecdotal, I have heard a fair number of people, including financially savvy ones, say they would take money out of a money market fund that invested in this entity. So retail money market funds are somewhere between a hard sell and a non-starter. Enhanced cash management fund would have been the perfect target, but a number have broken the buck recently. Some mangers are contributing cash to the fund to make investors whole; others are letting investors take losses. As a result, that type of fund is operating under a cloud right now. Expect there to be near-term net withdrawals and greater conservatism in investment, which works against the SIV rescue program.

Now there are other types of money market investors, for example, the treasury departments of large corporations. But the big funds are the obvious deep-pocket targets. Every time I look at this, I keep concluding that it is going to be hard to sell the CP to third parties (or have I missed something really basic and this is structure really all about ratings arbitrage so the CP is rated higher than the underlying assets, and the investors look like they are dealing with a bona fide third party, rather than a related entity? Then the banks buy the CP but face lower capital charges under Basel II? If so, this seems like an awfully costly and complicated process to achieve what seems to be a limited benefit).

Separately, note that the best-case scenario for having the fund operational has receded from the end of the year to early January. Citi had gotten what amounted to bridge financing through year end for some of its SIVs. What happens if the timetable slips again? And this isn’t a Citi issue; SIVs are starting to liquidate, and as assets come on to the market and are sold on an arm’s length basis, the wriggle room for any price finesse gets smaller and smaller.

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  1. Anonymous

    I think its wrong to assume there is no reputational risk.

    This is the same guy who allegedly turned down the Merrill job. Do you really think he’d sign up to run something he expected to fail from the get-go? Wouldn’t be particularly wise given the industry network he operates within.

    Why don’t you wait to see the structure rather than forecasting its failure based on partial information?

  2. Anonymous

    But isn’t Fink also the same guy rumored to be angling for the top Citi job?

    Can you see the conflicts?

  3. Anonymous

    Corporate Treasurers will not be buying the CP. They are terrified of the general SIV situation and should be.

    The enhanced cash model is in trouble and should not be looked at as large source of future liquidity.

    The large managers of Money Market funds should be split into three camps:

    1) Folks with large SIV debt holdings that are in major trouble. They are praying the MLEC can bail them out and will decide that supporting the MLEC may be their last best chance before losing hundreds of millions and impairing their franchise

    2) Folks with large SIV debt holdings that are in major trouble but will find it impossible to justify further doubling down on this mess to their clients..

    Shops like Federated, Fidelity, Janus, Wamco, Schwab, etc. will fall in either 1 and 2.

    3) Folks who manage funds at shops like Columbia (BofA), JP Morgan, Lehman, UBS and Blackrock. They are companies that are tied to the larger issues this thing represents. They have the biggest incentive to support an entity that will rig the market with artificially high prices. The SecLenders mostly fall into this cap as well. They will want to buy this junk as long as they can mislead their clients enough to get away with it.

    4) Shops like Vanguard, Dreyfus, The Reserve and Goldman who don’t own SIVs and would never be able to justify a new involvement in this disaster to their clients. They would also not ever want to participate in a scheme that is simply a bailout of their reckless competitors.

    So, this Titantic’s only real potential rescuers (buyers) are just the folks that are already on the boat. I think Yves has this one right. It can’t work. All SIVs and their stakeholders are slowly sinking. The deck chair metaphor has been used before and I think we will continue to see it used because it is true.

  4. Spec

    anon 7:01,

    Perhaps the creators of the SIV bailout should have been more thoughtful of how M-LEC would be structured prior to leaking information to the press. It seems to me that the Paulson announcement and subsequent leaks have sought to be encouraging to the market that some sort of “market solution” would be put into place. However, due to the lack of full disclosure and broad acceptance of the plan, it is open to criticism.

    Releasing the latest info on the bailout was obviously structured so that the least amount of people would be able to see it – right after midnight on the day before a U.S. holiday. Not a lot of market participants around to comment on it. Thankfully, Yves picked it up.

    It seems now with this choice of manager that any hope of transparent pricing (and success of the bailout) would now be gone. Blackrock would hardly seem impartial as the ownership stake by Merrill could greatly benefit by favorable prices of securities going into M-LEC.


  5. Anonymous

    The story is about the transfer of risk and the lack of accountability these banks have had. I suggest that instead of looking at the bogus nature of this SIV bail out fund, you look closer at ERISA abuse and question why banks seem to be using the assets of pensions to fuel subprime swaps that are exploding, i.e, look at the bond mkt in Europe, and the need to think over why things are crashing!

  6. Anonymous


    It’s clear that the rescue fund must be about creating transparency around what was previously opaque, and some risk sharing formula on that basis. My point is that I’ve seen absolutely nothing anywhere even speculating as to how that might be accomplished. So I consider such negative reporting to be interesting but of limited vaue added until the structure is defined. Until then, I suppose the thing has to be demonized on the basis no magic wand has yet revealed the design which in reality takes some time to put together.

  7. Anonymous

    People involved with this market have been given plenty of information about how this scheme will work. You have to admit that it is very telling that only Federated (owns $4 billion + of SIV debt) and Blackrock ($1 billion + and now the beneficiary of large management fees) are the only companies to voice support for this bailout.

  8. Yves Smith

    Anon of 6:28 AM and 7:01 AM,

    The definition of “failure” depends on how low your bar for success is. Remember how America’s inability to prevail in Vietnam was rebranded “peace with honor”? I am sure that whatever happens, the result will be declared to be a success.

    There is a fundamental conflict here, and I don’t see any structure that can realistically solve it. The SIV sponsors do not want to take assets out and show overly large losses. Yet money market investors are very skittish right now and are not going to fund the rescue entity unless they have confidence in the credit quality of the assets in the MLEC and believe those assets have been priced fairly. (Oh, and we have the separate problem that the MLEC is supposedly only going to be buying better assets, which means any assets left over are by definition toxic waste. What happens to them?)

    I don’t see any way around that conflict unless you have pretty substantial credit enhancement, high enough that the investors are looking to the guarantors rather than the assets to cover principal risk. And in this market where you can’t even buy CDS on single bank names, credit enhancement is very pricey (one presumes that the bank syndication is going to price the credit enhancement with reference to the CDS market).

    In my first post on the topic, I wondered why the sponsors were continuing to look to the CP market for funding. CP investors are particularly loss-intolerant, and using CP also gives the sponsors only a limited horizon to liquidate the assets. This is a new structure, there is no obligation to go back to the CP market for funding, and note investors have more tolerance for risk too.

    Thus with this structure, per Anon of 8:10 PM’s comment, the only parties that seem likely to fund this puppy are parties that have an interest in not seeing SIVs founder. The fallback is that the sponsors of SIVs that are selling assets to the MLEC will buy CP from it. And because this paper will get a high rating, it will require less regulatory capital than if the assets were taken onto their balance sheets.

    But I wonder if what I depict as Plan B is really Plan A…..

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