The CDO is one element in the process
of gathering & spreading credit while shifting risk & gaining yield
using primary and secondary markets to absorb synthetics using
tranche mechanisms. |
|
Structured investment
vehicles, SIVs, are off-balance sheet funds
created by banks. These issue short-term debt
(commercial paper, etc.) to acquire & finance
specific longer-term assets --recently subprime
mortgage-backed securities and similar assets. |
|
Citigroup, JPMorgan,
& BankAmerica have created a SuperSIV conduit backed by
other major banks to
serve as a buyer of last resort. |
|
Possibly some day
the next sources needed to fund the next new fund may not
have the funds to fund that new fund. |
|
| October
15, 2007 -- Three US banks, Citigroup, JPMorgan, &
BankAmerica announced a new mechanism & fund of approximately $80 to
$100
billion. The new Master Liquidity Enhancement
Conduit, or M-LEC, will be in operation within 90 days. It is
expected hold the assets until maturity to prevent an overhang on
markets. The M-LEC, will be
used to bail out
risk-takers who get caught taking excessive risk,
including Citigroup and other SIV investors. This super conduit will be empowered to
purchase assets from
any bank or fund around the world. |
|
According to a Moody's report in July, 2007, in total worldwide,
banks manage 36 SIVs. |
| SIVs
are typically purchased by institutional investors seeking to
increase returns without significantly raising credit risk, thereby
lowering ratings and increasing borrowing costs. |
|
According to data from the Federal Reserve, the amount of commercial
paper backed by mortgages and other assets fell to less than $900
billion as of October 10, from $1.18 trillion on August 8. According
to data from Bloomberg, the yield on 3-month commercial paper rose
to 6.20% in early September from about 5.30% in the preceding month.
In the last three weeks, it has declined to around 5.36%. |
| In
September, the US Treasury's Robert Steel, deputy under secretary
for domestic finance, and Anthony Ryan, assistant secretary for
financial markets, gathered top executives from around 30 banks into
a Washington meeting. Reportedly Treasury realized that the banks
involved were not talking to one another about the crisis. The US
Treasury, established the fund to be used to prevent a broader
security sell-off that would force additional write offs & write
downs. |
|
Citigroup reportedly has approximately $80 billion worth of SIVs.
Neither JPMorgan nor BankAmerica own SIVs. JPMorgan and BankAmerica
will participate in the M-LEC and will earn fees. |
| The
banks' broker-dealer operations could be paid for helping the new
structure raise capital. |
| The
conduit will raise most of its money by selling commercial paper.
Each member bank will put in an unspecified amount of its own
capital into the fund. Other US and non-US-based banks will likely
join the consortium within weeks. |
|
Citigroup led the push for the super conduit rescue plan. Large
amounts of its SIV debt come due in November. Increasingly debt
analysts were forecasting difficult times for SIVs. A Citigroup
research report that was issued two days before Treasury and the
banks met for the first time, stated, "SIVs now find themselves in
the eye of the storm". |
|
Banks would face
large losses if their affiliated funds were forced to sell billions
of dollars in mortgage-backed securities and other assets since that
selling pressure would force prices down. That would lead to large
write offs at those new, lower market prices. |
| During
recent months, Citigroup affiliates have sold some $20 billion in
assets. |
| Some
bankers object to the plan. They labeled it an escape loophole for
Citigroup, which has more SIVs than any other bank. Citigroup
accounted for approximately 25% of the global SIV market. As of
August, 2007, total assets held by SIVs according to various sources approximately amount $400 billion. |
|
|
The M-LEC fund is will buy securities rated AAA or AA
at Standard & Poor's and Aaa or Aa at Moody's Investors Service at
market prices. According to preliminary reports, it will not buy
subprime mortgage assets. |
|
Christian Stracke, a London-based strategist at CreditSights Inc., a
New York bond research firm said, "This is mostly symbolic... The
banks were going to need to inject more liquidity into the SIVs
anyway, so the public co-operation just makes the bail-outs of SIVs
seem more orderly." |
|
According to a September 11, 2007 report by UBS AG, SIVs' holdings
include about 41% financial-sector debt, 22% prime residential
mortgage securities, 12% collateralized debt obligations, 8% each
for commercial mortgage-backed securities and non-mortgage asset-
backed bonds, and subprime accounts at 2%. |
| Alex
Roever is a debt strategist at JPMorgan Chase who
has not been involved in discussions. He estimates that SIVs have at
least $320 billion in assets. |
|
The M-LEC will be used to
purchase risky mortgage securities and other assets
in order to decrease pressure on credit markets that
have the potential to threaten the broader economy. |