More Banks Abandon Paulson's Super-SIV Plan
HSBC was the first major player
to say no to the Super-SIV bailout program by directly providing
$35 billion in funding to SIVs.
HSBC said it's moving
Cullinan Finance and Asscher Finance, the two SIVs, onto its balance
sheet to prevent a forced liquidation of what it called
"high-quality assets." If HSBC did not make the move, the vehicles
were at risk of triggering market value or net asset value
restrictions that would've prompted sales of the debt portfolios.
The bank said it is providing up to $35 billion in funding, and its
balance sheet will expand by $45 billion.
On December 3
WestLB, HSH Nordbank Bail Out $15 Billion of SIVs.
WestLB provided a credit line
for its $11 billion structured investment vehicle called Harrier
Finance to repay commercial paper, the Dusseldorf-based bank said in
an e-mailed statement today.
HSH Nordbank said it will provide backup funding to cover all
commercial paper issued by its 3.3 billion- euro ($4.8 billion)
Carrera Capital SIV, spokesman Reinhard Schmid said in an interview.
By contrast, Citigroup, the largest manager of SIVs, said it will
avoid any steps that would force it to consolidate the companies on
its balance sheet.
MBIA Inc., the largest bond insurer, has cut its Hudson- Thames
Capital SIV to about $400 million from $2 billion by asking capital
note holders, who own the lowest ranking debt, to buy the fund's
assets, Chief Financial Officer Chuck Chaplin said last week.
Treasury Secretary Henry Paulson has been working with Citigroup
Inc., Bank of America Corp. and JPMorgan Chase & Co., the biggest
U.S. banks, to form an $80 billion "SuperSIV" fund to help avoid
forced sales by buying SIV assets. The Treasury aims to have the
master liquidity enhancement conduit, or M-LEC, running by yearend.
"Every day that goes by we are seeing more restructuring and
liquidity provision by sponsors," Shah said in an interview today.
"The longer M-LEC takes, the less of a need there will be for it."
Markets Move Faster Than Bureaucrats
While Paulson is hoping to have a bailout plan in place by the end of
the year, the only participants left to bailout might be Citigroup
(C), Bank of America (BAC), and JPMorgan (JPM).
What's left of Paulson's Super-SIV plan has more holes in it than a
stack of colanders. Obviously the market moves faster than
bureaucrats.
Why don't Citygroup, Bank of America, and JPMorgan take the assets
onto the balance sheet like the other banks are doing? Because they
can't. At least Citigroup can't. Citigroup already had to sell 4.9% in
equity to Abu Dhabi in return for $7.5 billion in cash as noted in
Petrodollars Return Home.
Indeed, the Citigroup / Abu Dhabi deal smells of desperation, a
thought noted by Professor Mark Bloudek in
Citigroup: The Real Deal.
So why was CDO exposure so secret?
The real outrage of the credit crunch has been in the way major banks
disclosed potential losses. The
next credit scandal is there are billions more in undisclosed
risk.
Citigroup had off-balance
sheet conduits with assets totaling $73 billion as of Sept. 30.
Almost every major banks has significant conduit exposure. But if
conduits are becoming a problem, banks are not saying much about it
in their financial statements.
So why was CDO exposure so secret?
Banks typically arranged and sold CDOs to investors, so the sold
ones would not appear on their balance sheets. In quarterly
financial statements, companies disclose their "variable interest
entities," or VIEs. These are entities to which a company has actual
or potential economic exposure. When it comes to inadequate CDO
disclosures, the VIEs that matter are those that are not
consolidated on a company's balance sheet.
This is partly the fault of the accounting rule -- something called
FIN 46-R -- that governs off-balance sheet VIEs. The big problem is
that it doesn't force companies to disclose realistic estimates for
losses. Under FIN46-R, companies must disclose their maximum loss
exposure. That sounds like a conservative approach, but in practice
it isn't. That's because banks often add comments in financial
statements that effectively tell investors not to take these maximum
loss numbers seriously.
Take a look at Citigroup's second quarter filing, posted Aug. 3,
which was well into the summer credit meltdown. In it, the bank said
actual losses from its unconsolidated VIEs, which included $75
billion of CDOs, were "not expected to be material." It has since
estimated losses could be between $8 billion and $11 billion (which
is most definitely material).
So the question becomes: Did banks have a good idea of what
off-balance-sheet CDO losses would be before they were disclosed?
The answer to that is: Almost certainly.
Is protection of Citigroup itself the
only reason left for the Super-SIV?
I think so and Fortune is raising the same issue in
Why Citi can't take the high road over credit mess.
As soon as the SIVs got into
trouble in the summer, the most obvious solution was for the banks
affiliated with the SIVs to take them onto their balance sheets. The
fact that none of them did so straight away raised a red flag over
the SIV mess.
Instead, the U.S. Treasury sponsored a move driven by Citigroup,
J.P. Morgan Chase and Bank of America to set up a new, larger Super
SIV that would buy up assets from the SIVs that came under pressure.
Since Citigroup has by far the largest exposure to SIVs - its seven
SIVs held $83 billion of assets as of Sept. 30 - the Treasury's
Super-SIV looked very much like a way of supporting Citigroup.
As more banks drop support for
the Super-SIV bailout plan, it is becoming increasingly clear the only
remaining purpose for the plan is to keep Citigroup from having to put
SIVs on its balance sheet.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/ |
