SIV Rescue Plan: RIP

The SV rescue plan touted by the Treasury Deparment and sponsored by Citigroup, JP Morgan, and Bank of America, has finally, officially, had a stake put through its heart today. It dies unmourned and unloved.

It wasn’t hard to see that this concept was unlikely to get off the drawing board. But with the Treasury’s prestige at stake, Paulson (and even Bernanke) flogging the idea and garnering front page coverage, the plan kept moving ahead, zombie-like, based on momentum rather than merit, demand, or utlility.

The sponsors nevertheless put a brave face on this move, saying the banks would “reactivate” the program if conditions warranted. I guess that’s Wall Street for “peace with honor.”

While the Vietnam comparison may seem strained consider: the US government, in this case a Treasury secretary, was unable to win the hearts and minds of a reluctant population, in this case both the supposed beneficiaries, the SIV sponsors, and the investors who would ultimately bear the risks. We witnessed the astonishing precedent of a Treasury secretary lobbying top bankers at a G7 meeting to promote what had consistently been depicted as a private sector initiative. There was also more that a bit of boosterism in lieu of reporting in evidence on this story at the Wall Street Journal.

A fitting epitaph comes via Bloomberg:

“The market is in surgery and they can’t even get the Band- Aids to work,” said Thomas Flaherty, who manages $25 billion in corporate debt at Aberdeen Asset Management in Philadelphia.

But in the denouement, BlackRock, engaged to act as manager of the program, doth protest too much, complaining that this exercise kept them from taking on other, presumably better-paying, assignments. Yet, but here the firm got tons of profile without having to put its reputation at risk by delivering an outcome. Sounds like awfully good PR to me. And the three sponsors, who incurred real expenses (a hundred lawyers were reported to be working on the deal) aren’t whining.

From the Wall Street Journal:

One of the federal government’s signature efforts to ease financial instability caused by the subprime-mortgage crisis collapsed as the nation’s three biggest banks gave up on a fund intended to rescue tens of billions of dollars in troubled investments….

Banks and Wall Street bond manager BlackRock Inc., which was overseeing the fund, issued a statement late Friday saying they no longer see the need for it. They said banks could reactivate the fund if conditions worsen….

….the government effort did little to end the larger crisis of confidence that has caused markets for bonds and other securities to freeze up. The Treasury Department also invested considerable time and prestige in pushing the super-SIV. As recently as last Monday, Treasury Secretary Henry Paulson said he was “still optimistic” about progress being made on it…..

One reason for the plan’s downfall was that it would only buy the highest-quality assets from the SIVs. That gave banks with SIVs less motivation to create a super-SIV, because the assets they most wanted to unload were those backed by more-troubled slices of mortgage debt.

Although the banks and BlackRock insisted as recently as last Tuesday that the super-SIV was on track and would be formally set up in a few weeks, they decided in the past few days that it was no longer necessary, according to people familiar with the matter. “We’ve heard loud and clear from the market,” said one person involved in the process.

Those exposed to the lower-quality holdings have had to handle them themselves. This includes taking losses on such holdings, as many asset-management units of banks have done. This past week, Morgan Stanley reported a $129 million loss related to SIV holdings in cash funds in its fourth-quarter results.

The abandoning of the super-SIV could be costly for BlackRock, given the amount of time, effort and technology it has invested in the initiative. The work is “taking some capacity away” from its ability to take on other assignments, BlackRock Chief Executive Larry Fink said recently.

From the Financial Times, which highlights the importance of the Canadian asset backed commercial paper market in the money-maker seize-up, as aspect that has gotten relatively little coverage in the US press:

The plan was met with scepticism and the need for the fund has receded as many SIV managers have shored up their finances…

Nevertheless, the banks this week restated their commitment to go ahead with the plan. The banks and the Treasury are expected to say that the plan for a “buyer of last resort” for SIV assets was worth pursuing and was only ever conceived as one of several possible options.

But it may be seen as a setback for Hank Paulson, the Treasury secretary, who publicly backed the plan and insisted that it would go ahead,,,,

Participants in Canada’s non-bank asset-backed commercial paper (ABCP) market were on the verge late on Friday of announcing a restructuring of 21 highly leveraged trusts, or conduits, which have been frozen since August.

The deal, covering close to C$35bn ($35.3bn) in assets, is understood to include major investors in the trusts, as well as more than a dozen Canadian and foreign banks. Under the restructuring proposal, the asset-backed commercial paper would be converted into longer-term securities with maturities of about seven years.

The foreign banks include Deutsche Bank, HSBC and ABN Amro. Their involvement stems from packages of credit default swaps that they sold to the conduits, giving them the right to make margin calls if the value of the assets declines.

The Canadian banks have been asked to help back-stop a credit facility that would enable investors to meet such margin calls. The Canadian finance minister and the governor of the Bank of Canada have taken an active, behind-the-scenes role, seeking to convince the banks that their participation is in the interest of market stability.

The Canadian ABCP market seized up when issuers were unable to roll over maturing paper as a result of turmoil in the US subprime market, investors’ diminishing appetite for risk, and the failure of emergency liquidity provisions in some ABCP issues.

Most major participants agreed to a standstill on liquidating assets and on lawsuits until Jan 31.

But investors have already taken sizeable writedowns on their holdings.

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One comment

  1. dearieme

    “the asset-backed commercial paper would be converted into longer-term securities with maturities of about seven years.” Aha, the old joke: a long-term investment is a short-term investment that went wrong.

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