Three Japanese Banks Asked to Back SIV Rescue Fund And Decline

I’ll be the first to confess that I am not current on who the logical suspects are in the loan syndication business these days, but I don’t think Japanese banks are the first parties one would call on. The SIV bailout plan (officially called the Master Liquidity Enhancement Conduit, or MLEC) was initially going to go out to 70 banks for credit enhancement, but now that the fund has been scaled back to $30 billion, the syndication effort was then expected to solicit a correspondingly smaller number of names, say 20 to 30.

Are we back to plan A due to lack of buy-in? The Japanese have apparently turned down the chance to support this worthwhile venture. And note the skeptical tone of the piece, and the surprising factoid that the size of the backup line commitments are up in the air.

From JCN Network:

Japan’s three megabanks have been asked to give financial support to a bailout fund being created by large U.S. banks to help shore up the market for distressed subprime-linked securities, it was learned Wednesday.

Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. have been asked to contribute to the fund, through such steps as establishing loan commitment lines, informed sources said.

The size of the requested commitment lines is yet to be fixed, the sources said.

Meanwhile, executives of the megabanks have flatly denied the possibility of investing in the bailout fund.

The fund is designed to buy assets from structured investment vehicles, or SIVs, which issue short-term debt to finance purchases of higher-yielding assets, to avoid a worsening of the credit crunch.

The requests to Japanese megabanks come amid speculation that the rescue fund, being set up by Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., can procure only half of the target 80 billion dollars.

The U.S. side is seeking contributions from major Japanese and European financial institutions apparently in the belief that bringing an end to the U.S. subprime loan crisis will help stabilize global financial markets.

Further confirmation of the flagging fortunes of the MLEC, and therefore the floundering efforts to find supporters, come in this Wall Street Journal story, “Enthusiasm Wanes for Fund to Bail Out SIVs.” There is now even discussion of the possiblity that the fund won’t succeed. I hate to sound self-congratulatory, but we called that one early.

From the Wall Street Journal:

After months of intense planning to create a fund designed to save banks and structured investment vehicles from big losses, the proposal appears to be losing momentum.

The nation’s three biggest banks have started to formally ask other financial institutions to join the fund, but some firms that were expected to sign up are now not as interested. As a result, the fund’s ability to provide a solution for the credit crunch is more uncertain than ever, according to people involved in the situation.

Wachovia Corp., one of the first banks to express interest in providing capital to the fund a few months ago, yesterday played down the need to do so. “The importance of it, in my view, is less today than we thought it would be 60 days ago,” said G. Kennedy Thompson, chairman and chief executive of Wachovia. Mr. Thompson said Wachovia has been formally approached to participate in the fund, but hasn’t yet made a decision. In October, a memo from a banker involved in the process estimated that Wachovia might be willing to invest $2 billion to $7.5 billion in the fund…..

Gordian Knot, which runs one of the largest SIV funds, has informed the banks it doesn’t intend to sell assets into the super fund, according to a person familiar with the situation. Gordian Knot declined to comment.

For the financial institutions that are putting the fund together and supporting it, the lukewarm response means management fees associated with it will likely be smaller than originally expected.

If the fund doesn’t succeed, “it’s probably going to be more of an expense” than a source of revenue, said Larry Fink, chief executive of BlackRock Inc., the money-management firm that is serving as the fund’s adviser.

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  1. Anonymous

    The Florida state investment pool announced that it will withhold payment of the $95M of interest earned on the funds in November, rather than pay it to the municipalities and school districts that own an interest in the pool. The decision was made to attempt to preserve the value of the fund, which has declined by an undetermined amount on losses on SIVs in which the pool invested.

    The counties and school districts, which used the funds as a cash account they could tap to meet expenses, protested loudly. Orange County – home of the state’s third-largest city, Orlando – will miss out on up to $800k in income for the month. The county’s controller said, “We thought we’d earned interest for the month … we don’t see any regulation that allows them to do that.” Investors are calling on the state to step in, but with lower income and property tax receipts due to the housing slump in the hard-hit state, it can ill afford to do so.

    Wachovia has offered loans to the schools and counties that want to withdraw additional funds, but they will incur undisclosed interest charges if they take the deal. Given that they’re already giving up interest income, most are reluctant to add interest expense to the hit they’re taking. The whole mess reiterates the point we made yesterday regarding the lesson from the Florida run: the first investor out is made whole.

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