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.
The better question is, how would it be inflationary? Absolutely no dollars are being added to the economy.
The difficulty has not been "assigning a value"; the difficulty has been for the big banks in "swallowing the true market value".
Which, by the way, is what the market is willing to pay for it. Seeing as how it's mostly all junk quality merch. with the backed assets that are declining in value, the corresponding price for the security/instrument should reflect that fact.
If it walks like a duck and quacks like a duck...
“superSIV”????
Somebody fire the marketing director!
There are lots of high-quality securities that are not trading at all due to a lack of liquidity. Any trades that have occurred have been at fire-sale prices as hedge funds dumped their good stuff to try and stay afloat.
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