SIVVE-MAE: The bailout plan and what I think of it

[c1ue]

http://seekingalpha.com/article/4995...ce=patrick.net

This link pretty much sums up my view on this subject with regards to the US banks:

One bank paying another bank a fee to avoid reporting their complete assets and liabilities on their balance sheet.

However, the question of how the lost money will be handled is still relevant, and more relevant is how the external entities who have created SIVs (i.e. Barclays) will fare.

Even a positive outcome of SIVVIE-MAE might not be enough to save the overall credit markets if enough foreign banks bite it too.

[Spartacus]

Re: SIVVE-MAE: The bailout plan and what I think of it

IOW, where wage slaves try to get FU money,

BAnks get (the US treasury is trying to give them) STFU money

http://www.itulip.com/article/49951-...ce=patrick.net

This link pretty much sums up my view on this subject with regards to the US banks:



However, the question of how the lost money will be handled is still relevant, and more relevant is how the external entities who have created SIVs (i.e. Barclays) will fare.

Even a positive outcome of SIVVIE-MAE might not be enough to save the overall credit markets if enough foreign banks bite it too.

[GRG55]

Re: SIVVE-MAE: The bailout plan and what I think of it

http://www.itulip.com/article/49951-...ce=patrick.net

This link pretty much sums up my view on this subject with regards to the US banks:



However, the question of how the lost money will be handled is still relevant, and more relevant is how the external entities who have created SIVs (i.e. Barclays) will fare.

Even a positive outcome of SIVVIE-MAE might not be enough to save the overall credit markets if enough foreign banks bite it too.

Well apparently Pimco and Fidelity like it.

Is it just me or is there something slightly embarrassing about having the US Treasury Secretary ceaselessly shilling for Citi?

SIV fund support grows with PIMCO, Fidelity: Draghi
Fri Oct 19, 2007 11:01pm EDT
By Francesca Landini
WASHINGTON (Reuters) - Support for a so-called super SIV fund designed to ease the stress of the subprime meltdown appeared to grow on Friday as a top global finance official said two giant investment funds had thrown their weight behind the endeavor.

Fund giants PIMCO and Fidelity have joined the so-called super SIV fund set up by three big U.S. banks, boosting confidence in the plan, Bank of Italy Governor Mario Draghi said at the close of a meeting of finance officials from the Group of Seven rich industrialized nations...

...Draghi said U.S. Treasury Secretary Henry Paulson had discussed the fund with officials attending the meeting of central bankers and finance ministers from the United States, Canada, Italy, France, Germany, Britain and Japan...

...Paulson's lobbying efforts in support of the fund were expected to continue over the weekend as top bankers gather on the G7 sidelines for a meeting of the Institute for International Finance, a global bankers' association...

...Paulson is likely to meet with the head of Deutsche Bank Josef Ackermann, head of the IIF and host of the meeting. Deutsche Bank is thought to be reluctant to join the fund, which some say will primarily benefit Citibank...

Link to article:
http://www.reuters.com/article/marke...0071020?rpc=44

[GRG55]

Re: Paulson's Ponzi...

This is now starting to take on a definite air of desperation. When was the last time a "market driven" activity required the US Treasury Secretary to strongarm people at a G7 summit?

From the FT today:

Paulson hits back at ‘superfund’ critics

By Krishna Guha in Washington
Published: October 20 2007 03:42 | Last updated: October 20 2007 03:42

Hank Paulson, the US treasury secretary, on Friday night hit back against critics of the plan to create a $75bn-plus investment fund to buy the assets of troubled investment vehicles, suggesting it is based on a misunderstanding of how the new “superfund” would work...

...Mr Paulson said “we have had a lot of conversations with market participants and conversations with the president’s working group” of regulators including the Federal Reserve about the asset-backed commercial paper market...

But he added “I cannot emphasise enough that this is market driven – 100 per cent market driven” with the Treasury playing only “a convening role and a facilitating role to help participants come together.”...

Link to article:
http://www.ft.com/cms/s/0/1b921838-7...nclick_check=1

[Jim Nickerson]

Re: SIVVE-MAE: The bailout plan and what I think of it

http://online.barrons.com/article/SB...gazine_columns

Alan Abelson's column 10/22/07

Enter Mr. Paulson, who put the arm on a number of major banks, even some that had no exposure to SIVs, to set up a fund with the real catchy name of the Master Liquidity Enhancement Conduit to help out the needy banks by buying securities from them, presumably at a discount. The obvious intention is to reassure the world that everything's hunky-dory and keep the banks, poor sensitive creatures, from having to show those squishy assets on their balance sheets.

Our considered view is that the supposed bail-out is a typical bit of Washington flash: all show and no substance. For a second, more tempered, opinion we turned to Punk Ziegel's savvy bank analyst, Richard Bove. He calls it "a horrible idea" that "would do nothing to solve any subprime-debt questions, mortgage issues, bad bank-loan problems etc... It would not bail out any bad loans from anyone, anywhere...It will not solve the liquidity problems where the SIVs need the most help and it will not reduce the debt problems facing the economy." (Otherwise, Mrs. Lincoln, how'd you enjoy the play?)

He also is adamant that the Treasury has zilch business sticking its nose in the SIV mess: "The Treasury's primary job is to fund the United States government. It should not be involved in working out debt problems in the private sector."

Lest Mr. Paulson take umbrage at these mild demurs, let us reassure him that there's inevitably one in every crowd. Actually, make that two in every crowd, since we must confess we subscribe unreservedly to each and every one of Richard's complaints.

I don't know Punk Ziegel nor its savvy analyist Bove. If Bove knows about what he is talking and his reasons correct, the probability is that MLEC will get an "all system go."

[GRG55]

Re: PIMCO not in after all...

Check out the final few paragraphs of this little item. You would think that a public announcement from a G7 Central Bank Governor would have been checked out before it was broadcast. Murkier and murkier...

Paulson Says SIV Fund May Be Running by Year's End
By John Brinsley
Oct. 20 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said a fund created by some of the biggest banks to help revive the asset-backed commercial paper market should be in place by the end of the year...

...Bank of Italy Governor Mario Draghi said yesterday that Paulson said Pacific Investment Management Co., manager of the world's largest bond fund, and Fidelity Investments, the world's largest mutual-fund company, are involved in discussions on the SIV rescue.

Draghi said today that while Pimco had been mentioned, the firm ``decided not to take part.''
``Nothing is definitive such as which institutions will choose to take shares in the super fund,'' he told reporters in Washington.

``Pimco is not participating,'' the Newport Beach, California-based company's spokesman, Mark Porterfield, said in an e-mail.

Link to article:
http://www.bloomberg.com/apps/news?p...&refer=economy

[jk]

Re: SIVVE-MAE: The bailout plan and what I think of it

my theory is that pimco was invited but doesn't have much exposure and so decided not to play.

[c1ue]

Re: SIVVE-MAE: The bailout plan and what I think of it

Seems to me that if PIMco doesn't want to play with SIVVE-MAE, that clearly this vehicle is just a window field dressing for SIV owner's balance sheets.

Of any investment group out there, PIMco would be one of the first ones to be looking hard at buying distressed but good debt.

[jk]

Re: SIVVE-MAE: The bailout plan and what I think of it

Seems to me that if PIMco doesn't want to play with SIVVE-MAE, that clearly this vehicle is just a window field dressing for SIV owner's balance sheets.

Of any investment group out there, PIMco would be one of the first ones to be looking hard at buying distressed but good debt.

my understanding is that sivve-mae will be buying "top-rated" mbs and cdo's for a price of 94 + a note for another 4. so if the paper pays in full, sivve-mae will earn 2/100 minus its costs, multiplied by its own leverage. on the other hand, if the paper turns to trash, sivve-mae is only protected down to 94. this looks like a way for citi [especially, but also others] to establish a [captive] "market" price to put a "value" on its own huge holdings. where's the upside for pimco if they don't hold much of this stuff? i agree they should be looking at "distressed but good debt," but the sivve-mae pricing very deliberately is not very "distressed."

[GRG55]

Re: SIVVE-MAE: The bailout plan and what I think of it

my understanding is that sivve-mae will be buying "top-rated" mbs and cdo's for a price of 94 + a note for another 4. so if the paper pays in full, sivve-mae will earn 2/100 minus its costs, multiplied by its own leverage. on the other hand, if the paper turns to trash, sivve-mae is only protected down to 94. this looks like a way for citi [especially, but also others] to establish a [captive] "market" price to put a "value" on its own huge holdings. where's the upside for pimco if they don't hold much of this stuff? i agree they should be looking at "distressed but good debt," but the sivve-mae pricing very deliberately is not very "distressed."

Unless a buyer of the Super SIV notes is getting a money-back guarantee on their investment from the sponsoring banks, they would have to do their own due diligence on each and every piece of paper brought into the SIV - a near impossible task I am led to believe given the complexity of CDO/CLO's. The alternative is to have confidence in whatever party is grading this stuff "top-rated". Under the current circumstances, just who might that trustworthy party be - Moody's, S&P, Fitch, Citi, JPM,...???

[jk]

Re: SIVVE-MAE: The bailout plan and what I think of it

Remember The Buckets


As the mortgage crisis unfolds, I think it is useful to remember that most mortgage-backed structured finance products use a cascade configuration. Practically, it takes some time until defaults are reflected in the cash flows of the AA and AAA tranches, because the first "hits" are taken against the lower-rated "buckets" and against whatever reserves were maintained as a cushion. From the perspective of the AA-AAA CDO holder, nothing has changed in his cash flow: he/she is still getting paid regularly.


What this means is that, absent a functioning secondary market, holders resort to mark-to-model to price their portfolios; since the cash flows are still unchanged for the AA-AAA tranches, models come up with high valuations. This explains why all concerned (banks, brokers and presumably hedge funds) took such relatively small write-offs on their CDO positions. But it also explains why holders of large positions in supposedly high quality bonds are in such a hurry to form the Super-SIV and get 'em off their balance sheets (but apparently no one else is biting). Because...

The big hits for the AA-AAA buckets are still in the future and they are not going to come from borrowers' missed monthly payments - that's just interest (mostly). As the process moves along from delinquency to default, repossession and eviction, the lower buckets may still be able to absorb some, if not all, of the losses stemming from lower monthly payments. The real crunch will come when REO auctions finally occur and the real estate is sold at prices significantly less than what is owed. That's when large principal losses will be realized, flooding the lower tranches and cascading in waves onto the AA-AAA buckets.

The sad truth is that there are no AA-AAA CDOs, not in the traditional corporate bond sense, anyway. Their structures make them inherently unstable past a critical point, after which their performance becomes non-linear on the downside. The banks know this very well (they engineered them, after all) and that's precisely why they don't want to hold them - it has nothing to do with lack of transparency or liquidity. Such products are large ticking bombs; their manufacturers can calculate with relative accuracy when they will explode, given timely data on delinquencies and defaults. As in any bankruptcy, how much money will be recouped will depend on the prices realized from the auctions, minus costs and fees.

That's why hedging via the ABX indices is becoming rapidly more expensive, even for the AAA tranches, and also why the rating agencies are finally starting to downgrade such issues by the tens of billions.

http://suddendebt.blogspot.com/

[GRG55]

Re: SIVVE-MAE: The bailout plan and what I think of it

http://suddendebt.blogspot.com/

Nice find jk.

Here's an article in the FT that I thought also made some good points. The "socialisation of risk" theme will be familiar to iTulipers, of course. These concepts are finally starting to surface with increasing regularity in the mainstream media.

Now we just need to get Fox Business to interview EJ

FT REPORT - FUND MANAGEMENT: Slicing and dicing risk rebounds on banks

By John Dizard, Financial Times
Published: Oct 22, 2007

Hedge funds and their related speculative vehicles are now so identified with engorged private wealth that we forget that a few years ago the policy tribe saw them as a tool for the general public's interest. In the late 1970s and early to mid-1980s, the big worry among central bankers and the like was that too much risk was being concentrated in the big banks. "Third World" or "LDC" (lesser-developed countries) debt, speculative real estate loans, unemployed oil tankers - they were all on balance sheets that were ultimately underwritten by central banks and government deposit insurance. The big question was how to avoid the risk of a forced nationalisation of the banking sector.

The answer, in the 1980s and early 1990s, was an artificially steep yield curve and credit risk curve, that gave the banking sector the cash flow necessary to gradually pay down the losses from the previous excesses. This was a huge drag on growth, sentiment, and the electoral prospects of people such as the first President Bush...

...So the slicing and securitisation of risk, with the riskier assets going to the hedge fund accounts of rich people uninsured by the state, was the solution. The banking system would act as a lower-risk intermediary and operations manager. The taxpayer-supported insurance funds would be solvent even with low reserves and low premium payments.

Now the crisis over the structured investment vehicles (SIVs) shows all that is going into reverse. In retrospect, one wonders why anyone thought that rich people would graciously assume the losses incurred by the financial sector's excesses. That is not why they are rich in the first place...

...In other words, the securitisation-risk- dispersion-hedge-fund-rich-people-eat-losses solution to the problem of financial excess did not work. Profits will be privatised, and losses socialised, just like they were in the last cycle. That will be the reality behind the chit-chat in the form of "public-private" legal constructions, convenient accounting fictions, think-tank chin stroking, and editorial finger waving...

Link to article:
http://search.ft.com/ftArticle?query...nclick_check=1

[jk]

m-lec allows the banks to keep the waste off their books

m-lec allows the banks to keep the waste off their books:

Citigroup SIV Accounting Looks Tough to Defend: Jonathan Weil
By Jonathan Weil

Oct. 24 (Bloomberg) -- The more Citigroup Inc. says about its structured investment vehicles, or SIVs, the more questionable the bank's accounting for them is beginning to look.
On Oct. 19, Citigroup issued a one-page fact sheet about the seven SIVs it sponsors, all of which it keeps off the balance sheet. Among other things, the largest U.S. bank said it ``has no contractual obligation to provide liquidity facilities or guarantees to any of the Citi-advised SIVs.''
Okay, so it has no explicit obligation. That begs the question: Does Citigroup have any implicit obligation to protect SIV investors from losses? Citigroup isn't saying. It's a crucial question. If Citigroup is implicitly obligated to absorb most of the SIVs' losses, then the SIVs already should be on Citigroup's balance sheet, under the accounting rules.
Many big investors piled into SIVs as a way to juice returns during the years of cheap, easy credit. The funds typically borrowed short and bought long, issuing short-term commercial paper and investing the proceeds in assets with durations stretching several years, including mortgage-backed securities.
The strategy yielded nice spreads as long as SIV debt- holders remained confident about the credit quality of the funds' assets. When credit markets began seizing up in the summer, it left many SIVs unable to roll over their commercial paper. That has fueled concerns SIVs may have to dump assets at fire-sale prices, taking the broader markets down with them.
Implicit Obligation
Citigroup, the world's largest SIV sponsor, holds no equity in its SIVs. The SIVs raised capital by issuing notes to investors who agreed to bear the risk of the funds' ``first losses.''
The company has its reputation on the line, though. Citigroup organized, pitched and manages the SIVs it sponsors, creating expectations it would stand behind the funds and protect their investors. Those investors include money-market funds that bought the SIVs' commercial paper and themselves may have implicit obligations to keep their net asset values from falling below $1 a share.
In a Sept. 5 report, Henry Tabe, managing director of Moody's Corp.'s SIV-ratings team, said the ``blow to a bank's reputation that may be occasioned by a failure of an SIV may be more than the bank can tolerate.''
``Even where the bank does not invest in the capital, the relationship with capital note investors may be such that it behooves the bank to avoid losses to capital note investors to protect that relationship,'' Tabe said. Citigroup says its SIVs have about $80 billion in assets. It hasn't disclosed the size of their liabilities.
By the Book
Citigroup officials declined to discuss the bank's accounting analysis. In a statement, Citigroup said it ``is confident that it has accounted for the SIVs it sponsors on behalf of investor clients properly and in thorough accordance with all applicable rules and regulations.''
In its 2006 annual report, Citigroup classified its SIVs as ``variable-interest entities,'' or VIEs. That means they are covered under a 2003 set of rules by the Financial Accounting Standards Board called FASB Interpretation No. 46(R), as well as a related 2005 FASB paper on ``implicit variable interests.''
Under the rules, if a company is obligated to absorb a majority of a VIE's expected losses, it is deemed the entity's ``primary beneficiary'' and must consolidate the entity on its balance sheet. Such obligations can be ``explicit or implicit.'' VIEs used to be called special-purpose entities. The FASB issued FIN 46(R) in response to their abuses by Enron Corp.
``FIN 46(R) requires a company and the auditors to understand all the arrangements in the structures, both explicit and implicit, and also understand the design and intent behind those structures,'' FASB Chairman Robert Herz says. ``And if there's a party at risk for a majority of the expected losses, then that party has to consolidate.''
Treasury Help
Companies also must periodically reconsider if a VIE's primary beneficiary has changed. So, implicit guarantees ``must be taken into consideration both at the inception of the VIE and at specific reconsideration events -- like the rollover of commercial paper in an SIV,'' FASB member Tom Linsmeier says.
``If a bank sponsor in deteriorating credit markets feels it is necessary in order to protect its reputation to provide an implicit guarantee of additional support to a VIE, and that additional support would make it the party that is expected to absorb the majority of losses, then the bank sponsor should be consolidating the VIE,'' Linsmeier says. Linsmeier and Herz declined to comment on Citigroup specifically.
It's also possible for a VIE to have no primary beneficiary. That seems to be part of the attraction for banks looking to pony up money for the Master Liquidity Enhancement Conduit that Citigroup is trying to organize, with help from the U.S. Treasury Department.
The megafund would shore up SIVs by buying their assets and preventing fire-sales. Because no one bank would be at risk for a majority of any losses, no bank would have to consolidate the fund, which is looking to raise $60 billion or more.
So, the proposed cure for Citigroup's off-balance-sheet SIVs is more off-balance-sheet accounting. There's no surer sign that Citigroup is worried about its potential SIV losses.

http://www.bloomberg.com/apps/news?p...columnist_weil

[lobodelmar]

Re: SIVVE-MAE: The bailout plan and what I think of it

I think Allan Sloan's article in Fortune is right on the mark:

"Citigroup: 'Gimme shelter' - Why on earth, Fortune's Allan Sloan asks, should we protect banks from their mistakes?"

http://money.cnn.com/2007/10/26/maga...ion=2007102914

If Citi's only problem is that it can't liquidate its SIVs without a profit hit, too bad. If Citi's very existence is at risk, I don't think we dare let it fail, because that would drag down institutions throughout the world. But if the bank needs help, its shareholders should have to pay. Bigtime.

[c1ue]

Re: SIVVE-MAE: The bailout plan and what I think of it

If Citi's very existence is at risk, I don't think we dare let it fail, because that would drag down institutions throughout the world.

On the one hand, I'd hate to see Citi go down as I have money in them in several countries around the world.

On the other hand, Citi has gone to the brink now twice in the last 20 years due to overly aggressive lending policies. Maybe it is time to remove this source of systemic risk from the system...

Of course, I also dumped my Citi shares from the last time already - maybe I'll be ready to buy back in - in 2012!

c1ue's folding money thread