Wall Street Journal Versus the Financial Times on the SIV Rescue Plan

Once again, another example of the Wall Street Journal basically printing a press release and calling it a story, as contrasted with the Financial Times, which did some real reporting. The object lesson today is the latest news on the SIV rescue plan, which has retreated from the limelight as the Treasury’s other brainchild, the subprime sham bailout, took center stage.

The Journal’s story is an upbeat progress report: all is well, BlackRock officially signed up on Friday, syndication to start Monday, program to be launched mid-January. No acknowledgment that “mid-January” is yet further slippage in the schedule. To give an idea of the tone of the piece:

The effort to recruit the world’s biggest banks to participate in a massive rescue fund of troubled debt investments is officially kicking off…..

On Monday, syndication activity is expected to go into high gear….

One of the most important features of M-LEC — also known as the super-SIV — is that it strives not to punish SIVs holding particularly large baskets of hard-to-sell assets…..

BlackRock is already surveying credit markets to get a handle on the appetite for the medium-term notes and commercial paper that M-LEC will need to sell in order to raise money for its SIV asset purchases, according to a person familiar with the matter.

BlackRock could profit handsomely from its role in M-LEC. One Goldman Sachs analyst has estimated at least a 5% potential accretion to certain 2008 earnings estimates for BlackRock from its role in the super-SIV. That estimate assumes a 0.3% management fee on a $75 billion fund.

Many challenges lie ahead for BlackRock and the three banks leading the charge. A sense of urgency is mounting to get M-LEC up and running, particularly as credit-ratings agencies continue to downgrade many SIV-related assets.

Contrast this portrayal with a Financial Times article, which found serious opposition to the fee structure. Remember, some SIVs are being liquidated now, and we’ve heard no reports of a crisis. Banks that sponsored large SIVs, like HSBC, are taking them on to their balance sheets and presumably winding them down gradually.

Remember also that the rescue plan vehicle, the MLEC, would buy only the high-quality assets, leaving the SIVs holding the dreck. While the press has been reporting on the falls in SIV net asset values (prevailing levels are below 70%,) that does NOT mean the SIVs’ assets have fallen in value by 30%. The NAV figure measures the fall in the value of medium term notes, a thin slice of subordinated debt. Because the funds are highly geared, you need to divide the fall in NAV by 14 times to get an idea of the fall in the value of the total assets of the SIV. Thus, a fall in NAV of 30% means the SIV’s assets have fallen by a bit over 2%. That gives some context for the discussion below.

Note also that the FT article confirms that the bailout vehicle will use a pricing strategy for the SIV assets that was floated earlier and got a negative response, namely, valuing the assets that go into the MLEC on the prices at which small trades would take place. That was criticized as being a non-market price which would impede getting investors to fund the deal. Commercial paper and particularly medium term note investors are not going to want to buy paper in the MLEC unless they believe the prices for the assets are reasonably close to current market levels or there is considerable credit enhancement, which would be costly. We have repeatedly said it wasn’t clear at all whether the desires of the SIV sponsors and the investors who will be asked to fund the deal could be reconciled, and this still appears to be an open question.

From the Financial Times:

The fees being proposed by the planned superfund for structured investment vehicles (SIVs) are too high for it to be workable, according to some of the vehicles it has targeted.

The fund, being put together by the top three US banks with the backing of the US Treasury, intends to charge heavy upfront fees to SIVs in addition to an 8 per cent “haircut” on asset sales into the fund.

Some SIVs have said that the costs are too high for them to be interested. “It will be painful for the SIVs and there have been a lot of complaints,” said one person close to the process. But some of this appeared to be normal negotiating tactics, he added….

The upfront fees will be paid to the banks providing liquidity backstops for the fund…..

To protect the banks from credit risk, the fund will pay only 92 per cent of the price of a SIV’s assets in cash. The rest will take the form of notes, redeemable if there are no defaults on the assets….

It will determine the market price for a small trade in a particular asset, which the SIV will get regardless of the volume it is selling.

The banks had originally talked about raising $75bn for the fund but the potential demand from SIVs is decreasing as some managers seek other solutions to their funding problems….

Some critics of the plan saw it as a way to bail out Citigroup, which manages SIVs with $66bn of assets. However, it is not certain that Citi will make use of the fund.

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  1. Dingo

    And why hasn’t the press addressed the conflicts involved with having Blackrock set the prices. I’m not sure this is well known but I think it is important to know that Blackrock money market funds hold over $1.198 Billion in SIV debt. Including the following holdings in Citi sponsored SIVs:
    Beta $243mm
    Dorada $68mm
    Sedna Finance $476mm
    Zela $60mm
    (This is from a BoA equity research piece dated 11/9, you can find it on Bloomberg)

    I don’t see why they are looked at as the savior when they got themselves caught up in this mess too.
    The conflicts seem very troubling to me.
    Blackrock wants to save its own funds.
    With their large Citi SIV holdings motivations are aligned with Citi.
    And don’t forget that Merrill still owns most of Blackrock. After Citi, Merrill is clearly the most in need of SIV-type asset prices getting set artificially high.

  2. Anonymous

    Right in dingo!

    I also liked how Florida brought in Blackrock to help with bond illiquidity, while the conflict of interest question was ignored, in regard to Blackrock Florida pensions. One must realize that regulation is a non-issue in these matters and that collusion is everything! Go look at Florida pensions with blackrock!

  3. Anonymous

    U.K. commercial property fund managers, including UBS AG, Deutsche Bank AG and Aviva Plc’s Morley operations, have told investors that they will need to wait a year to sell units, the Financial Times said.

    Deutsche Bank told investors in its Rreef U.K. real estate funds, worth about 2.7 billion pounds, that they will have to wait for up to a year, the newspaper said. UBS’ 2.3 billion-pound Triton property unit trust is also invoking a 12-month waiting period for some investors, the FT said. Investors in Morley’s one billion pound pooled pension property fund have also been told of a wait of up to 12 months for redemption, the newspaper said. Aviva’s Norwich Union unit is also “preparing for every eventuality” for its commercial property fund, the U.K.’s largest, if investors keep leaving the industry, the FT said. The company said there was no immediate plan to suspend redemptions, the newspaper reported.

  4. dingo

    Wow, I forgot about Florida. Blackrock has a fiduciary duty to those “school and fire districts” in Florida,to its own customers and I guess also to the SuperSIV sponsors (Citi, BoA and JPM). Can Blackrock bailout the Florida funds, Citi, and also somehow avoid writing a big check to make their own money market funds whole all at the same time? How is that going to work???

  5. Anonymous

    Crane is reporting that the largest enhanced cash fund is going down:
    “multiple investors and sources tell Crane Data that redemptions have been frozen temporarily but may be made “​in kind”, and that the pool is beginning the process of winding down or liquidating”
    This was a $40 billion+ fund.

  6. Anonymous

    Some critics of the plan saw it as a way to bail out Citigroup […]. However, it is not certain that Citi will make use of the fund.

    To begin with, we had a problem in search of a solution, and now we also have a solution in search of a problem. Instead of meeting, they’re floating past each other like ships in the night.

  7. Anonymous

    This is a great tie in to my on-going plight to alert people about pensions!!!

    Re: Wilshire memo warns on US LDI products

    by Alex Beveridge 7 December 2007

    US – An internal Wilshire memo sent to all its senior consultants has warned them of potential legal pitfalls for clients when advising on the suitability of liability driven investment (LDI) products in the US.

    The concerns centred on an advisory opinion given by the Department of Labor (DOL) in October 2006.

    It was sought by Donald Myers of ReedSmith on behalf of JPMorgan Chase Bank and asked for clarification on whether it was prudent for a fiduciary to consider LDI under the Employee Retirement Income Security Act (ERISA).

    Under ERISA, investment strategies must primarily benefit the pension plan. As LDI strategies seek to reduce pension fund volatility, it could be argued they could also benefit plan sponsors by reducing volatility on their overall balance sheet.

    The DOL advisory opinion subsequently approved the use of LDI as described in the request, however, the Wilshire memo raised concerns LDI marketers didn’t recognise the limits of the advisory opinion.

    Dimitry Mindlin, managing director at Wilshire, told Global Pensions: “It bothered me a great deal when many LDI marketers told us at conferences and presentations that this advisory opinion was the final word. I read the opinion and I found it inconclusive. Although I am not an attorney, I believe that if this ever ended up in a court of law, they would not find it very helpful.”

    One senior executive from an American asset manager, who asked not to be named, backed Mindlin. He noted: “The advisory opinion does not address the significant potential conflict between two goals – maximising the probability that the plan’s funding objective will be met by a particular investment strategy in the long run and reducing volatility of the plan’s funded status on an annual basis.”

    He said the first goal was clearly prudent under section 404 of ERISA, but the second goal was problematic if it conflicted with the first goal. He suggested the argument the benefit to the plan sponsor was more than incidental could be applied if, in a bid to reduce annual volatility, it adopted a strategy that reduced the probability of funding the plan in the long run.

    Marc Van Allen, a partner and member of the ERISA litigation group at law firm Jenner & Block, said: “From an ERISA fiduciary point of view, [when] looking to implement LDI, pension funds have to satisfy their twin duties; duty of loyalty and duty of care. The tricky part can be separating the benefits to the plan from the benefits to the plan sponsor’s balance sheet.”

    He said the ERISA fiduciary needed to be able to demonstrate they were principally focusing on the benefits of the plan. “If there then turned out to be some sort of incidental benefit to the plan sponsor, then that’s OK,” he said.

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