SIV Rescue Plan "Increasingly Irrelevant"

A story by Eric Dash in the New York Times, “Big Banks Scale Back Plan to Aid in Debt Crisis,” does a good job of explaining why the SIV salvage operation brokered by the Treasury Department and sponsored by Citigroup, Bank of America, and JP Morgan, may in the end not accomplish very much.

The main reason is the crisis is proving to be a non-crisis, as the SIVs sponsors seem to be resolving their problems on their own. The biggest indicator is that the value of SIVs outstanding has already fallen from $400 billion to roughly $170 billion. Yes, the asset-backed commercial paper market is still shrinking, but that is due to concerns about lack of transparency and possible subprime exposures, which exist independent of how SIVs are wound up.

The article contains another bit of information: in addition to accepting a haircut on assets sold to the fund of 8% (they will receive medium term notes instead of cash) participants would also pay a fee of 1% of assets sold.

From the New York Times:

Today, after a month of false starts, a new superfund created by the banks to keep the crisis in housing-related debt from deepening will begin raising money from financial institutions.

But the role of this new entity, established at the behest of the Treasury, is already coming into question. Citigroup, the financial giant that first proposed the initiative, is devising a separate rescue plan, according to people briefed on the situation…..

Originally it was thought that the entity, called a Master Liquidity Enhancement Conduit, or M-LEC, might raise as much as $80 billion that could prevent a sharp sell-off in securities owned by structured investment vehicles, or SIVs. Now, the M-LEC, known on Wall Street as the Super SIV, may raise just $60 billion, in part because many of the troubled SIVs are winding down themselves.

“Who needs a Super SIV anyway?” asks Alex Roever, a JPMorgan Chase fixed-income analyst, in a new research report. “There certainly seems to be a shrinking supply of SIVs to save.”….

The SIV industry, which once sat atop $400 billion in assets, has withered as the credit crisis has swept financial markets. Excluding Citigroup, which has $66 billion of assets in bank-affiliated SIVs, the industry now has about $100 billion assets that might need to be rescued, according to Mr. Roever’s report. And that amount is expected to shrink even more by the time the backup fund comes into being….

On Friday, new details emerged about how the Super SIV would work…

SIV sellers must also agree to expensive terms. In exchange for their securities, SIVs must pay an upfront fee of about 1 percent of the assets they commit to sell. They also must agree to accept only about 92 percent of their designated value in cash, according to people briefed on the plan. That percentage can go up or down with the assets’ quality.

The backup fund will make up the difference in the form of junior debt, backed by the assets of the entire giant fund. (Unlike ordinary SIVs, all of the backup fund’s debt will be fully protected by emergency financing committed by its big bank sponsors.)

One crucial feature of the new backup fund is that it is intended not to hurt SIVs that need to unload large quantities of their assets. Pricing terms will remain the same regardless of size.

Still, most SIVs are unlikely to participate…

Citigroup, the industry’s biggest participant, is formulating its own workout plans. It recently said that it will “not take actions” that will bring SIV assets onto its balance sheet. Besides furiously selling its holdings, Citigroup has been quietly supporting its SIV programs by buying their commercial paper. It has also lined up additional funding until mid-January, when the backup fund takes effect.

Citigroup SIV managers, meanwhile, have also proposed allowing investors who hold the riskiest slices of its SIVs’ debt to exchange them for a portion of the SIV assets, according to people briefed on the plan. Not all investors can cut such a deal, but if enough sign on, it may pave the way for a complex restructuring.

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