SIV Rescue Plan Still Lumbering Forward

Despite the widely-held view that the SIV bailout plan engineered by the Treasury Department and sponsored by Citigroup, JP Morgan, and Banks of America will be largely irrelevant, the program keeps moving forward. We have the latest press release, um, update, courtesy Bloomberg:

The “SuperSIV” fund, set up to provide cash to structured investment vehicles hurt by the collapse of the subprime-mortgage market, plans to start buying assets “within weeks,” its sponsors said today.

The fund’s size, originally envisioned at about $80 billion, will be based on “SIVs’ needs and evolving market circumstances,” Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and BlackRock Inc. said in an e-mailed statement. The banks are raising money for the fund while BlackRock will manage its assets….

The fund, also known as the Master Liquidity Enhancement Conduit, or M-LEC, can still provide “an optional source of liquidity for eligible high-quality assets,” the banks said in the statement.

Update, 12/19, 3:00 AM: In comments, alert readers have pointed out that Sigma, an SIV in all but name, managed by Gordian Knot, may be a $50 billion shoe about to fall. Additional tidbits from the Financial Times:

Syndication of the bank liquidity facility for the fund should be completed by the end of the week, allowing the fund to start marketing to SIVs. It is expected to be up and running by January….

In recent weeks, a number of banks that manage SIVs have said they will provide funding for the vehicles. Last week, Citigroup, which is one of the banks backing the superfund along with Bank of America and JPMorgan Chase, said it would take SIVs with $49bn of assets on to its balance sheet. Observers have said that these moves have reduced the potential supply of assets to the superfund.

But people close to the fund say these SIVs might still sell assets into the fund.

In a joint statement, the banks and BlackRock said they “applauded” the moves by SIV managers. The superfund was intended “as another solution to help facilitate orderly short-term credit markets”, they said.

“As SIVs unwind by selling assets, M-LEC is intended to play a constructive role by offering SIVs an optional source of liquidity for eligible high-quality assets,” the statement said.

The size of the fund, which was originally estimated at $75bn but is now expected to be smaller, would be driven by “SIVs’ needs and evolving market circumstances”.

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  1. Eddie

    Sigma. Look out for Sigma.

    Sigma was put on negative outlook by S&P today.

    Sigma is going down and it’s going to hurt a lot of money funds.

    Maybe the banks think the SuperSIV can do something about it but the SuperSIV will not save Sigma.

    Sigma is a $50 billion bomb about to go off.

  2. NC Jim

    Tne Economist voiced concern that the Super-SIV is an attempt to warehouse the toxic waste and repeat the Japanese strategy of out of sight, out of mind – thus delaying dealing with the underlying problems.

  3. Franklin

    I saw the S&P note on Sigma. It is strange how they go so far out of their way to not say Sigma is an SIV. Sigma’s triggers are a little different than most SIVs but it is still and SIV. It is an SIV that does not have a bank behind it. Managers of Money Market funds holding Sigma must not be happy campers right now.

  4. Anonymous

    SIVs, which sell short-term debt and invest the proceeds in higher-yielding securities such as bank bonds and mortgage-backed securities, reduced their holdings by more than 25 percent since August to $298 billion, according to Moody’s Investors Service. At least $84 billion more is being restructured by banks that set up the funds, according to data compiled by Bloomberg.

    The average net asset value for SIVs has tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody’s.

    At least half of the 30 or so SIVs have yet to announce bailout plans. Even those that have been disclosed require approval from bondholders, including proposals by HSBC and Rabobank Groep NV.

    Devised by former Citigroup bankers Stephen Partridge-Hicks and Nicholas Sossidis in 1988, SIVs aim to profit by borrowing at least 10 times the initial funding provided by long-term capital or income noteholders. The money is invested in hundreds of securities from asset-backed debt with AAA credit ratings to bank bonds. Mortgage debt made up 23 percent of SIV assets, with most having no direct subprime link, Moody’s said in July.

    SIVs profit by using top credit ratings to borrow at low short-term rates. The model had broken down by September when money market investors either stopped buying SIV debt or charged as much as 6.3 percent on 30-day asset-backed commercial paper, the highest rate in more than six years. SIVs were left paying more to borrow than they were earning, Moody’s said in a report in September.

  5. Anonymous

    Bottom Line On SIV Vertical Slicing comes from Warren:

    To the Shareholders of Berkshire Hathaway Inc.:
    Our gain in net worth during 2005 was $5.6 billion

    …. And that’s where we are today: A record portion of the earnings that would go in their entirety to
    owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers.
    Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large
    portions of the winnings when they are smart or lucky, and leave family members with all of the losses –
    and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).
    A sufficient number of arrangements like this – heads, the Helper takes much of the winnings;
    tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the
    family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American
    equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to
    no one

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