One SIV To Rule Them All
When Bankers Collude, Who Wins?
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." --Adam Smith
We’re back from Shreveport, Louisiana, and just catching up on things after a few days in the land of cotton, oil rigs and riverboat slot machines. Bess levin will shortly report with the latest on Chuck Prince and his loyal board of directors. We’re also looking into all those stories on the anniversary of Black Monday, catching up on the layoff rumors, following the Nobel prize news, trying to repair our television so we can tune into the first day of Fox Business (we suspect it was sabotaged by CNBC) and wondering what’s happening with Northern Rock. (Feel free to drop us a note—in comments below or an email to tips@dealbreaker.com—on any stories, rumors or half-assed theories you think we should be writing about.) Eventually we’ll report on our adventures in Shreveport, and what we learned about the future of gambling. But let’s start out with this Treasury department led bailout of Citigroup plan to enhance credit market liquidity through bank collusion cooperation.
As it turns out, the solution to the troubles some of the world’s largest banks have run into with their structuredinvestment vehicles—often called conduits—is…another structured investment vehicle. A structured investment vehicle to end all structured investment vehicles. Or, at least, backstop them.
Some of the worlds biggest banks—including Citigroup, Bank of America. and JPMorgan Chase –are teaming up to prevent SIVs from having to dump assets into the market. The banks have been unable to refinance the SIVs to pay off investors, and have been loath to sell the assets into an arid credit market, for fear that they will further depress prices for the short term debt they hold. This would have the effect of possibly forcing the banks to further downgrade the value of other short term assets they hold more directly and might further reduce demand by scaring off investors.
One solution would be for the banks to take the SIVs onto their books, essentially bailing them out. They want to avoid this at all costs after already having suffered major losses in the credit markets. It has also created a kind of prisoners dilemma, where some banks are hesitant to take the SIVs on book for fear other banks might dump the assets into the market.
The Treasury Department organized a way out of this dilemma: cooperation. Secretary Hank Paulson and Robert Steel put together a series of meetings of the big players to help them organize a cooperation solution. And the result is a Super SIV, another off-balance sheet vehicle funded by the banks that will buy up the assets of the troubled SIVs.
The move is being criticized as a bailout of Citigroup, in particular, and of the banks which started the SIVs in general. People are making comparisons to Long-Term Capital. The lead critic seems to be John Malkin, a principal at Caxton Associates who has said the plan “stinks.”
Interestingly, neither Bank of America nor JPMorgan Chase have SIVs under their aegis. So what’s in it for them? Allegedly, they are in it for the fees. Citi, BofA and JP Morgan all stand to make money from fees for starting the Super SIV. But we’re also hearing from anonymous sources that both JP Morgan Chase and Bank of America were worried about broader credit market fall-out from a SIV-asset dump, and this helped make them eager participants in the Super SIV.
Credit market innovator Charles Ponzi could not be reached for comment.
We’re still studying the details, and plan to round up reactions from everyone. Developing, as they say…
Comments
One?
Posted by: Anonymous | October 15, 2007 11:11 AM
one...?
Posted by: Anonymous | October 15, 2007 11:13 AM
What details? there's more details than that? Where did you get these details?
Posted by: Anonymous | October 15, 2007 11:14 AM
I'm still confused. How is this new super SIV going to be any more transparent than the asset backed SIV's its bailing out. In the absence of a government guarantee, I'm not sure why anyone who is not buying the current ABCP on offer would go for this.
Posted by: ian | October 15, 2007 11:16 AM
Repackaging crap to sell it is a time-honored tradition in finance.
Maybe some of the crap in these SIVs will be negatively correlated and hedge itself out.
Posted by: lift all the offers | October 15, 2007 11:30 AM
Where is Bess?
Posted by: B3$$ F4N #1 | October 15, 2007 11:41 AM
We are now entering another room in the fun house of quantum physics structured finance.
Posted by: de Cosmos | October 15, 2007 11:53 AM
Ian is right. This deal looks fishy. Let's take some complicated junk, get together with other guys with complicated junk, pool our garbage under the watchful eye of the government, and then claim we're doing it in order to achieve higher transparency. Am I missing something here??
Posted by: Michael Bolton | October 15, 2007 11:57 AM
Apparently, it's still not obvious to people why the Fed cut the funds rate by 50bps...
It *wasn't* economic growth fears.
It *wasn't* an easing of inflationary pressures
It looks a lot more like the heads of the major US banks (and who knows who else) probably met with Mr. Bernake and said "Look, we've got a problem here with these things we created. If you don't give us a reprieve via open market operations, we're done."
So in the meantime, these banks have been figuring out how exactly they can get these anchors off from around their necks. It's not that their holdings are "illiquid" - it's that they're illiquid at the kind of prices they would like to think the assets are worth.
The heads of these banks probably didn't just meet this weekend at the Four Seasons and sketch out some ideas on a napkin...this has probably been in the works since before mid-September.
IMHO.
Posted by: Chris | October 15, 2007 12:03 PM
how many bank employees need to be fired to make up 100 billion in losses?
Posted by: reality bites | October 15, 2007 12:08 PM
Fascinating post, Carney. It doesn't surprise me that JPM and BoA would jump in – I'm sure the fees are worth their while. Now, my real purpose here: correcting your awful grammar. My apologies, as your post is so interesting that I feel some remorse in being a grammar/proofreading douche.
“Interestingly, neither Bank of America and [sic] JPMorgan Chase don’t [sic] have SIVs under their aegis.”
What I think you’re going for is: “Interestingly, neither Bank of America nor JPMorgan Chase have SIVs under their aegis.”
Posted by: Kelsey Grammar | October 15, 2007 12:19 PM
at least he used SIV and not STD.......
Posted by: funny | October 15, 2007 12:24 PM
Finally a post containing... information. *gasp*
Carney is back and so is Dealbroker!
Posted by: nm | October 15, 2007 12:28 PM
Several people here hit the nail on the head. I'll just add that this is a scam of magnificent proportions. What a joke.
Posted by: inIT4the$ | October 15, 2007 12:31 PM
information, but no entertainment. get a life, nm.
Posted by: Anonymous | October 15, 2007 12:31 PM
Mayo to Citi: I notice you had negative operating leverage this quarter
Citi to Mayo: Thats right Mike, we had $5 billion losses in five weeks, how do you think we should have offset that with expense cuts?
Mayo to Citi: Suck it, Prince. I'm going to hump my sell recommendation on your stock until everyone is sick at the sound of my voice, because I got a call right once a decade ago.
Posted by: booya dealbroker | October 15, 2007 12:35 PM
WHOA! Let's fact check people.
A SIV isn't a SPECIAL investment vehicle it's a STRUCTURED investment vehicle. That's just as bad as saying an STD is a Specially transmitted disease.
Also, the banks aren't gonna create a SIV to save the SIVs. It's most likely going to be a conduit. A SIV is structured with subordination and with less than 100% liquidity. If the banks were to save it, they would probably backstop the fund with 100% liquidity. A conduit to save the SIVs, but they're not replacing a SIV with a SIV.
Posted by: Eric | October 15, 2007 12:41 PM
when anyone else loses money in a business, you take a hit to cash and equity. When banks lose money, they get to call it an asset and re-sell it...
Posted by: funny but | October 15, 2007 12:49 PM
Ever the cynic, this is a cheap trick to spread around the huge exposures Citi, BoA and JPM have to junk ABS without having to bring it back onto their balance sheets.
If the junk has life it can live. If it is dead, then all those loans handed out have to be written off and we have one big bloody bad debt that the markets don't want.
We all complain that the Germans, Japanese, Chinese and French prop their markets up and now the US is doing the same.
Looks like we are all socialists now comrades ...
Posted by: Finbar Taggit | October 15, 2007 12:59 PM
Carney, i don't know how much trump is paying for that advertising space of his new graphic novel, but it's definitely not enough.
His slogan + comb over is really disgusting me and i can't bare to look at it anymore...anyone agree?
Posted by: sellout | October 15, 2007 01:02 PM
sellout, I threw my LCD out the window when I saw that douchebag Trump on my screen this morning. I've gone through four screen so far.
Posted by: Anonymous | October 15, 2007 01:09 PM
You're absolutely right, Fin/12:59, it's completely hypocritical for the T Dept. to support this shady play. That said, it's a fairly smart business move for the banks, as they get to unload/contain shitty debt and make money off the repackaging fees.
Posted by: Anonymous | October 15, 2007 01:10 PM
@Anonymous 12:31 PM
I actually do have a life, for which I don't need to get my daily dose of entertainment online.
Posted by: nm | October 15, 2007 01:21 PM
OK here we go:
Citi has been pitching this for awhile. In addition to the fees Citi,BOA and JPMC have control rights of the structure. If you are one of the unlucky SIV owners to fork over your collateral they will give you an awful bid for your asset and an IOU discount that effectively gives you a timy Mezzanine/equity position in the structure. The assumption is that this will not be a going concern but an orderly liquidation vehicle (no reinvestment). Think Resolution Trust Corp but on Steroids. Fed Window will back liquidity on the CP (implied).
Posted by: SIVandletdie | October 15, 2007 01:46 PM
TBTF
Posted by: Anonymous | October 15, 2007 01:59 PM
TBTF
Posted by: Anonymous | October 15, 2007 01:59 PM
Rump actually inserts HIS OWN TESTIMONIAL into this marketing campaign. "It's the best thing I've ever written". Since when can you promote yourself using testimonials from your own mouth. Trump is reinventing the wheel here...and it's awesome/eye abusive.
Posted by: sellout | October 15, 2007 02:08 PM
Trump actually inserts HIS OWN TESTIMONIAL into this marketing campaign. "It's the best thing I've ever written". Since when can you promote yourself using testimonials from your own mouth. Trump is reinventing the wheel here...and it's awesome/eye abusive.
Posted by: sellout | October 15, 2007 02:08 PM
so banks form an off balance sheet investment fund to channel their stinky offsheet investment vehicle through? I call it the FASTOW
Posted by: eltb | October 15, 2007 08:40 PM