Posted on 10/13/2007 12:35:10 PM PDT by bruinbirdman
Leading U.S. banks have reportedly been meeting with U.S. Treasury officials about creating an up-to-$100-billion fund to stave off the danger that there could be a fire sale of shaky mortgage-backed securities, collateralized debt obligations and other distressed assets following the recent global credit crunch.
Such a fire sale could force big banks and hedge funds to write off or write down similar assets, setting off a second wave of the credit crunch that could flood into the broader economy.
The talks represent the latest official effort to restore liquidity to credit markets. In August, the Federal Reserve cut interest rates. Earlier this month, Fed officials said while there are signs of improvement, some markets remain under stress.
Citicorp, J.P. Morgan Chase (nyse: JPM), Bank of America (nyse: BAC), Goldman Sachs (nyse: GS) and HSBC (nyse: HBC) are among the banks taking part in the series of discussions that have been held over the past two or three weeks at the Treasury Department in Washington, D.C., according to published reports.
The focus of the fund would be structured investment vehicles, off-balance sheet funds created by banks and which issue short-term debt such as commercial paper to acquire and finance specific longer-term assets, recently subprime mortgage-backed securities and similar assets. They are typically bought by institutional investors seeking to boost their returns without raising their credit risk.
SIVs hold $320 billion of assets worldwide, down from $395 billion in July, according to Moody's (nyse: MCO) Investor Services. At their peak they accounted for more than a third of the asset-backed commercial paper market. Many SIVs had trouble rolling over their short-term debt when the credit crunch struck in July as losses in securities linked to subprime mortgages started to spread, leading to the $75 billion sell-off.
Citicorp, which invented the SIV in the 1980s, has seven such funds with $100 billion in assets. It has warned shareholders that third-quarter profits would fall 60% thanks to $5.9 billion in charges and losses from the late-summer market rout and which has led to a shake-up at the bank's top management. (See "Shake-Up At Citicorp.")
Reports say that under the plan being discussed the bank would create a superSIV conduit, backed by the other participating banks and to act as a buyer of last resort.
Ping
Get the Feds, I mean the taxpayers, to guarantee the deal and off we go into another round of spend fast.
How would this not be inflationary? And how would inflation work to the advantage of those holding mortgages? Sounds like an act of desperation to me.
I'm sure it's just a coincidence that they want a $100 billion buyout fund.
Isn't off-balance sheet what Enron did with the help of Citicorp?
Why not create a Federal agency. They could call it the RTC or FADA.
Why should those who are saving for a home be penalized by rewarding all the people who took out loans they couldn’t pay back?
Houses would be a lot cheaper if traditional lending standards - home loans for 3x-4x annual income with 20% down - were followed.
For example, the median house price in California was North of 500K. that implies an annual income of at least 125K. 125K is _not_ the median household income in California.
"creating an up-to-$100-billion fund to stave off the danger that there could be a fire sale of shaky mortgage-backed securities, collateralized debt obligations and other distressed assets following the recent global credit crunch.
It appears to me Citicorp is attempting to create some collateral behind the SIVs. Like a bank has to have a reserve before it can lend. Like $7 in reserve for a $100 loan.
Since there had been little liquity (buying and selling) in SIVs before (they were rolled over), there was difficulty assigning a value to "shakey" securities. Establishing liqudity prevents panic or sales at any price.
I see no bailout here. The banks are talking to the Fed about setting up a "bank sponsored funds" for their own SIVs.
yitbos
>Why should those who are saving for a home be penalized by rewarding all the people who took out loans they couldn’t pay back?<
It is NOT PC to require people to be responsible for their actions or inactions! If you were stupid, as I was, and used self control when you bought your home, then you (and I) were foolish.
Now true criminal behavior is treated as seriously by both parties I believe.
Why not just drop $100 bills from a helicopter?
It's hard to find a candidate who subscribes to these values, mister. I can only seem to find one...
I went looking for other articles on the subject, and apparently the Treasury approached the banks rather than the other way around. It looks like these SIV’s are one step up the food chain from mortgage backed securities and are the next potential liquidity problem.
Eh,eh. 12 cents on the dollar instead of zero. Would like to see the "bid, ask" on them.
yitbos
What about “free markets” and all that?
Buyer beware.
yitbos
This round of bailout is clearly got to be called DIREA (Dumb Idiots Reacting Emotionally Again)!
For crying out loud, this is the private sector putting up its own money to create liquidity in the market. This kind of action is a GOOD thing. I’m surprised by some of the comments on this thread.
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