News broke only yesterday that a consortium of banks led by Citigroup was putting together a $100 billion "master" structured investment vehicle to bail our faltering structured investment vehicles and prop up the market for asset backed securities. David Gaffen of MarketBeat has christened the new Super SIV with the name "the Entity" and we like that enough to adopt it ourselves.
Already the Entity is coming under fire from critics who view it as either government meddling in the markets—Treasury Secretary Hank Paulson and undersecretary Robert Steel reportedly brought the banks together to hatch the Entity—or a sleight-of-hand by banks to cover even deeper credit market losses.
"It is disappointing,'' William Niskanen, chairman of the Cato Institute in Washington and a former member of President Ronald Reagan's Council of Economic Advisers, tells Bloomberg's Brendan Murray and Simon Kennedy. "It does go against the Bush administration's preferences. Like all bailouts, it creates a moral hazard problem. I'm unhappy with situations like these.''
In an editorial this morning, the Financial Times wonders whether the plan for the Entity is sound.
"Even some of the banks involved wonder whether Citigroup, which could contribute a quarter of the assets in the new fund, is being bailed out of its lending errors with a murky form of innovative off-balance sheet financing. That question applies to every bank that will kick in assets," the FT editors write.
Others see something even more sinister at work in the Entity. One reader leaving a comment on MarketBeat describes it as a way to cover up falsification on the balance sheets of the banks.
"So, they want to create this vehicle, to buy assets from another of their vehicles, in order to falsely state the value of the securities on their balance sheets. That indicates that, in spite of its $6 billion write off, Citibank has not really written off even a fraction of its true losses. The other banks, including BofA and JP Morgan are not participating to "earn fees" as has been bandied about. They also own huge amounts of this asset-back commercial paper that noone wants anymore. They own it, and continue to place false values on it, although they do not own in in the form of an SIV, as Citibank does," the reader writes.
This morning on Squawk Box, Jim Chanos of Kynikos Associates said he had doubts about whether the Entity will actually get off the ground. He thinks that investors will be hesitant to buy into the Entity, especially since the people who are giving assurances about the quality of assets that the Entity will buy are the same people who overvalued many debt securities that have since had to be repriced.
Reading: Remember Enron [MarketBeat]
Paulson Credit Push Earns Jeers From Free-Marketers [Bloomberg]
Cleaning up after credit innovation [Financial Times]
Posted by , Oct 16, 2007 12:01PM
I know next to nothing regarding "The Entity" but I am very intrigued. I don't see how this can be viewed as a good thing. Who is putting in this 100B? Once "the Enitity" eats these losses does a 500B "Super Enitity" then need to cover the entites losses?
Seems like an awful idea. The speculators should pay for poor investments, it's as simple as that. They took the risk (reaped many rewards) and are now left to deal with their decisions.
sounds a little like enron to me.