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.