Saving Face (SIV Rescue Edition)

Events have overtaken the SIV rescue plan brokered by the Treasury Department and sponsored by Citigroup, Bank of America, and JP Morgan. The concept, first announced as a way to unfreeze the commercial paper market, is now being depicted as providing only modest benefits, namely, giving bank sponsors more time to sell the vehicles’ assets, thus dampening market impact. But the real benefit, of course, is keeping capital constrained banks (that means you, Citi) from taking the assets on to their balance sheets.

The plan was looking increasingly irrelevant, as some SIVs were being forced to liquidate, and HSBC’s decision to consolidate its SIVs placed pressure on sound banks to do the same. Thus, some observers thought it would be permitted to die a quiet death. But Citi, having had all but a trivial slice of its remaining SIVs downgraded or put on watch by Moodys, still badly needs the rescue, and Treasury has invested too many chips to let it go by the wayside.

Accordingly, the Wall Street Journal maintains that the SIV plan is still alive, but on a reduced scale, since the sponsors are finding little interest among the SIV sponsors that were expected to participate. We said early on that this plan looked to be for the benefit of Citi, and that is turning out to be the case.

But is the plan viable? Despite the update, note the complete absence of any substantive advance. The sponsors were supposed to have syndicated the credit enhancement shortly after Thanksgiving. Had they had any success, they would have announced the names of additional participants to create the impression of momentum. (Note this failure isn’t surprising, since the SIV business is concentrated in London and UK banks have been hoarding cash. This isn’t a good time at all to hit banks up for credit commitments). Instead, they’ve been sounding out interest and will start “formal syndication” in the next few days. At best, that puts the organizers another two weeks behind the latest timetable, which contemplated a launch the first week of January.

And consider this: there is still no mention of a term sheet, a structure for the deal, or fee arrangements. This enterprise requires the cooperation of other firms; they’d have to be circulating some sort of documentation if the plan were to have any hope of launching on any reasonable schedule. Why the continuing pretense that this undertaking is even remotely on track?

From the Wall Street Journal:

The three banks assembling a “super fund” aimed at helping to ease the global credit crunch are scaling back its size due to a lack of interest from financial firms that are supposed to benefit from the plan, according to people familiar with the matter.

Originally envisioned as a $100 billion fund that would buy assets from the struggling investment vehicles, the fund may now wind up being about half that size, these people said….

People familiar with the banks’ plans say they are proceeding with the fund despite the smaller size. The banks, which have informally been seeking participation from other financial institutions, expect to start a formal syndication process within the next several days….

It isn’t clear if the super fund will succeed in helping to solve the SIV problems. If not, banks that sponsor these vehicles could be forced to take their assets onto their balance sheets. That would erode the banks’ capital bases, potentially impeding their ability to lend. Furthermore, accounting rules that would be associated with such a move also could erode the banks’ financial position.

Already, credit-rating firms are beginning to take a hard look at the SIVs, and any downgrades could prompt more liquidity problems and scare off investors….

Although liquidity hasn’t returned to the markets, some of the SIVs are balking at participating in the fund, according to the people familiar with the situation…

Meanwhile, the SIV situation doesn’t seem to be getting any better. Last week, debt-rating firm Moody’s Investors Service said it downgraded or put on review debt totally $119 billion that was issued by SIVs. Moody’s downgraded or put on review for possible downgrade debt totaling $64.9 billion that was issued by six Citigroup SIVs.

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  1. Been there

    When’s Citi’s fiscal year end? It seems that continuing the charade may provide them cover for at least not being forced to take the SIV assets onto its balance sheet for the current fiscal year audit.

  2. Anonymous

    Yves, you say

    the SIV business is concentrated in London

    Can you point me towards any statistics that substantiate that?


  3. Anonymous

    Tango is among $105 billion of SIVs that Moody’s Investors Service is considering downgrading in its biggest wave of rating cuts since subprime mortgages contaminated the bond market. Moody’s yesterday delayed its decision on SIV ratings, citing “wide-ranging remedial measures” by some SIV managers.

    Rabobank is following HSBC Holdings Plc in London, WestLB AG in Dusseldorf and Hamburg-based HSH Nordbank AG in announcing plans to restructure SIVs. The companies have led a 25 percent reduction in assets to $298 billion, according to Moody’s.

    SuperSIV Fund

    The banks are pushing ahead with attempts to reorganize ahead of a plan by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. to set up a so-called “SuperSIV” to buy SIV assets. The three banks have scaled back the size of the fund because fewer financial firms are interested in using it, the Wall Street Journal reported today, citing people familiar with the situation.

    Tango has reduced assets from 9.7 billion euros through disposals and by selling holdings to creditors, Rabobank said.

    The SIV’s net asset value, a measure of what would be left after selling assets and repaying debt, has fallen to 69 percent of capital from 88 percent in September, Moody’s said last week.

    SIVs, set up to borrow short-term and invest in longer-dated securities, are having to sell assets and restructure after money market investors including Orange County in California stopped buying their securities.

  4. Anonymous


    Funding arrangements for $105 billion of structured investment vehicles (SIVs) were thrown into the spotlight today as Moody’s Investors Service extended its high-profile review of the credit-intensive market after receiving “material information” about possible changes.

    The rating agency said it had received fresh details about potential operational changes at SIV issuers, which include some of the most powerful international investment banks.

    In a short update circulated this afternoon, the agency suggested that a number of investment banks were working with SIV managers, often hedge funds, on bailout strategies for some of their beleaguered vehicles.

    Barclays, HSBC and WestLB have already guaranteed to stand behind their SIVs to prevent emergency sales of assets.

    Some $60 billion to $65 billion of the SIVS covered by Moody’s today represent six SIVs arranged by Citigroup. A spokesman denied any suggestion the Wall Street banking giant was restructuring its SIV exposure, stating that its policy remained one of gradualling reducing its assets.

    “In some cases, SIV managers are contemplating changes to their management strategies with the objective of reducing market value risk for senior debt investors, while in other cases SIV managers are in the process of implementing restructuring proposals that would provide more protection to senior debt holders,” Moody’s said.

    Moody’s said it needed more time to assess the “evolving nature of these wide ranging remedial measures” and the impact of each individual plan.

    The agency said it expected to conclude its SIVs review within two weeks, but would update investors following the conclusion of each individual review.

    The move came less than a week after Moody’s affirmed, cut or put under review ratings covering about $130 billion of SIV securities, many of which have hit financial crisis after the seizure in credit markets cut off their source of funding.

    Moody’s has put 42 per cent of the $300 billion SIVs market under review for possible downgrade.

    Today’s Moody’s move came as WestLB, the German banking group, promised to bail out its two SIVs, worth a combined $13.2 billion.

    Just weeks after offering an emergency line of credit to its $2.9 billion Kestrel Funding SIV, WestLB agreed within recent days to stand behind its $10.3 billion vehicle, Harrier Finance.

  5. Anonymous

    Instead, Paulson capped his punish-the-public debtor bailout plan with a call to Congress to let taxpayers be bled by their local governments in order to fund the bailout. Hey, no one can accuse the administration of taxing the responsible to pay for the greedy and ignorant if they don’t do it directly, right? Sorry, Hank, but we’re on to you.

    The details are in The Wall Street Journal. The new Paulson hit on taxpayers would come via legislation that Hank is pushing to allow municipalities to issue more tax-free bonds and use the proceeds to bail out the people who made stupid or greedy bets on real estate with loans they can’t afford anymore.

    This is probably the dumbest and most venal of the cavalcade of bailout plans. It’s venal because it would shift the cost of homebuyer and Wall Street greed onto innocent bystanders — us, the people who fund those bonds. It’s dumb because it presumes that municipalities are smart enough to allocate capital intelligently in the mortgage markets.

    I would love to hear Hank P. explain to us how local governments will acquire the requisite expertise to assess mortgage risk or values so that they can effectively buy, sell, refinance, and/or insure mortgages.

    Keep in mind, this is a job so complex and fraught with risk that it was royally screwed up by a multibillion-dollar industry full of “experts” — that is, until the going got tough and they decided to throw in the towel. There’s no way municipalities can be expected to make good decisions about whom to bail out, or what the right price would be.

    Finally, it will introduce the moral hazard that hamstrings real markets by institutionalizing the notion that every Wall Street and Main Street excess should be bailed out by us commoners whenever our elected officials deem it convenient. That is, whenever the press looks too ugly. And don’t be fooled — this is about political posturing in the face of bad press.

    As another Journal article explains, the current problem with subprime isn’t really ARM adjustments; it’s that the borrowers couldn’t afford the loans in the first place, even at the teaser rates. Moreover, this problem will continue for years, well beyond “subprime.” There’s plenty of “Alt-A” ARM paper out there that will be resetting until 2010 and beyond.

  6. eal

    Rescue this!

    Top CDO Classes May Lose 80 Percent, Barclays Says (Update1)

    By Jody Shenn

    Dec. 6 (Bloomberg) — U.S. mortgage assets in collateralized debt obligations have lost so much value that the top classes of the securities may be worth as little as 20 cents on the dollar in a liquidation, Barclays Plc analysts said in a report.

    About 20 percent to 30 percent of principal would be covered for the “super senior” portions of mezzanine asset-backed bond CDOs, which mainly contain mortgage bonds and other CDOs initially assigned low investment-grade ratings, Barclays said in the report yesterday. The senior-most classes of CDOs containing highly rated asset-backed bonds would recoup 30 percent to 65 percent, it said.

  7. Anonymous

    what is the deal on marking these SIV/CDO/MBS/ABSs to market valuations and when do these munis have to come clean with repurchasing and replacing these things which are not AAA rated? This issue is very much a localized city/county and state bond obligation problem! Do taxpayers realize the danger in this game paulson and bush are playing???

  8. Anonymous

    There needs to be a lot more input on this tax payer issue!! Where is the money now and where will it go; will it be regulated??

    Re: Government Code Sections 16429.1, 53601, 53601.6, 53601.7, 53601.8, 53635, 53635.2, 53638, and 53684 include a number of requirements on how and where public money may be invested. Figures 1 and 2 provide a synopsis of the permitted securities and conditions for using them. Prohibited investments include securities not listed in Figures 1 and 2, as well as inverse floaters, range notes, interest only strips derived from a pool of mortgages, and any security that could result in zero interest accrual2if held to maturity, as specified in Section 53601.6. Consensus recommendation: Include the list of permissible securities in the investment policy,and modify the list to meet the unique needs of the local agency. These modifications may include additional restrictions on the type and amount of specific authorized investments to reflect the risk tolerance of the agency.

    e. No more than 30 percent of the agency’s money may be in Bankers’ Acceptances of any one commercialbank. f. “Select Agencies” are defined as a “city, a district, or other local agency that do[es] not pool money indeposits or investment with other local agencies, other than local agencies that have the same governing body.”g. No more than 10 percent of agency’s money may be invested in any one issuer’s commercial paper. h. Issuing corporation must be organized and operating with the U.S. and have assets in excess of$500,000,000.i. “Other Agencies” are counties, a city and county, or other local agency “that pools money in deposits orinvestments with other local agencies, including local agencies that have the same governing body.” Localagencies that pool exclusively with other local agencies that have the same governing body must adhere to the limits set for “Select Agencies,” above. j. No more than 10 percent of the of the agency’s money may be invested in the Commercial Paper of any one corporate issuer. k. No more than 30 percent of the agency’s total funds may be invested in CDs authorized under Sections53601.8, 53635.8, and 53601 (h) combined.

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