The Entity

The Super Siv Is Shrinking, Possibly Dying?

The Super Siv is not working out. According to Robin Sidel’s article in today’s Wall Street Journal, expected investors are balking. “The nation’s three biggest banks have started to formally ask other financial institutions to join the fund, but some firms that were expected to sign up are now not as interested,” Sidel reports. “As a result, the fund’s ability to provide a solution for the credit crunch is more uncertain than ever, according to people involved in the situation.”
Just the other day, CNBC’s Charlie Gasparino reported that the Super Siv may be whittled down to just a third of its expected size. Can a 30 billion dollar fund really do the job the Super Siv was meant to do? How long until we get to stick a fork in this thing?
Enthusiasm Wanes for Fund to Bail Out SIVs [Wall Street Journal]

Downsizing The Super-SIV

The so-called Super-SIV is looking a little less super. The Wall Street Journal reported this morning that the SIVs sponsors are scaling back plains and now predict it might be cut down to half its intended size. Investor appetite has been scant, raising the possibility that the bailout SIV might not have enough assets to perform according to design. Some questioned whether $100 billion was going to be enough to bring life back to the market for SIV assets. Now that we’re down to $50 billion the situation looks even bleaker. Add to this the fact that the plans still seem vague and no major investors have come forward to announce their support, and you might start to conclude that this thing might never really get off the ground.
Questions are also being raised about the claims that the Super SIV would only buy high-quality assets from the SIVs. With downgrades and steep discounts still tearing through the credit markets, it’s not clear what exactly counts for a “high quality asset.” We were told by one money manager who recently left a large institutional investor that there is widespread lack of confidence in the ability of the banks backing the Super SIV to properly assess the risk of various assets held by the SIVs.
“Actually, right now I’m tempted to say that ‘high quality SIV asset’ is an oxymoron,” he said.
‘Super Fund’ for SIVs, Hoped for $100 Billion, May Be Half the Size [Wall Street Journal]

So is this why Larry Fink, the chief executive of BlackRock, either passed up or was passed over for John Thain? Everyone absolutely knew Fink was the number one pick to run Merrill Lynch after Stan O’Neal’s ouster but some how the job went to New York Stock Exchange boss Thain. And know we know are entertaining ourselves with the thought that this might have happened because Fink had a task far more important at hand.
Since you already read the headline you know that the task he is taking on is saving Citigroup, but not by becoming it’s chief executive. He’s already said to have passed up that job too. As it turns out, he’s taking a job that may even be more important—managing The Entity, the superfund being assembled in a secret laboratory by Citigroup, Bank of America and JP Morgan Chase.
Last night the Financial Times broke the news that BlackRock, the asset manager 49% owned by Merrill Lynch, is expected to be tapped by the banks to manage The Entity. Apparently Fink has become a strong advocate of the fund and has made BlackRock the leading candidate to manage the fund.
The super fund plans to bailout many of the world’s biggest financial institutions by buying up assets from faltering structured investment vehicles. It has come under fire from critics who argue that the super fund is just a way to get the SIV assets even further removed from the balance sheets of banks, so that when they eventually do have to be written down the banks don’t have to record the loss. Some have described the fund as a bailout of Citigroup, which is responsible for some of the world’s largest SIVs.
“Look. B of A is the Stupid Bank. Citi is the Incompetent Bank. JP Morgan is Villainous,” one fund manager affiliated with a large Wall Street firm told us. “The super SIV is Stupid, Incompetent and Villainous.”
While the Treasury department, which has backed the fund, and the banks behind it claim that it will be able to hold the SIV assets for long enough for the market to recover from the current credit crunch, many do not expect an appetite for those investments to return to the market anytime soon. In fact, some think the super fund may be designed to collapse after it has safely isolated the balance sheets of the banks that are investing in it.
“These things are worth what they are worth. Putting it in a super fund doesn’t change that,” the fund manager said. “Eventually the assets will have to be sold off at steep discounts, and the rest written down to nearly nothing at best. The banks know this, which is why they are trying to get this stuff as far away from their balance sheets as possible.”

Superfund lines up BlackRock
[Financial Times]

bankpaysyoudividend.jpgThe Treasury’s Entity is seen as a Citigroup bailout by lot of people for the very simple reason that it is a Citigroup bailout. That might not be the only thing it is, but stupid is as stupid does, and one thing this stupid thing does (or will do, if it ever gets off the ground) is bailout Citigroup, which is reportedly on the hook for as much as $80 billion from it’s four mammoth SIVs. Since the fund could buy Citigroup’s SIVs, it would reduce the amount that Citigroup would need to write off. And reducing write-offs is something Citi desperately wants to do right now.
There’s at least a fair amount of quiet clapping about the Treasury Department’s role in creating the Entity. Citigroup, some say, is too big to fail, and the Treasury Department should step in to prevent the kind of financial market disorder that would come from the toppling of the towering financial giant.
But this kind of logic has some rethinking the wisdom of the financial regulatory reforms that allowed banks such as Citi to grow so large in the first place. When lawmakers reformed depression era laws that stood in the way of these financial super-markets, they tended to sound libertarian notes about allowing financial innovation and the operation of the free market to control the size and scope of Wall Street firms. The era of government planning was over. So the Glass-Steagall Act of 1933, which had separated investment houses from commercial banks—most famously requiring JP Morgan to part from Morgan Stanley—was changed to permit the growth of the universal banks.
Many now think that the universal bank is a failed strategy. From Citi to Merrill to Bear Stearns, there are calls for Wall Street firms to slim down, break-up and concentrate on the core businesses that made them wealthy and famous to begin with. But was it a failure? If growing into financial giants allowed them to unilaterally acquire a secret—and nearly costless—government insurance policy, it seems like a great gamble. The executives and shareholders get the upside, while the broader public insures against failure.
“What a scam that is,” writes William Greider in The Nation.
And it’s a scam the Greider thinks is over. Banking regulation will inevitably make a big comeback, he predicts.
“At least the unambiguous truth about ‘financial modernization’ is now on the table for all to see,” he writes. “That should keep the Wall Street guys from whining for a while about the oppressive nature of bank regulation. The next reform era, when it does finally arrive, will head in the opposite direction–restoring public protections for the little guys against the greedy excesses of big hogs.”
What Greider doesn’t mention is that this era of new regulations might be coming too late. Or, rather, right on time, depending on your point of view. Resistance to a new wave of banking regulation requiring bank breakups and dividing Wall Street according to regulatory fiats rather than market demand is likely to be weak in an era when many think the financial supermarket model has failed and should be abandoned. No-one expends much time, money or energy defending a right to do something they don’t want to do anyway. What’s more, there will be plenty of money made by investment bankers spinning-off, selling and acquiring the fragments they are shoring up against the ruins of the toppled giants. Some of these people may actually be the same ones who made fortunes building the giants.
And we’ll all raise a glass to the only saloon in town where it’s never last call: the Wall Street punch bowl.
Citibank: Too Big to Fail? [The Nation]

Party Pooping Free Market Rebels Still Fighting The Entity

MCP.jpgWe’re totally surprised that there has been so much negative reaction to the plan by the Treasury Department, Citigroup, JP Morgan Chase and Bank of America to create a $100 billion fund to buy bad credit products that no-one else wants with money from investors who wouldn’t buy those credit products directly. Doesn’t everybody understand that the solution to debt problems is always more credit? If you don’t invest in the Entity, somebody bad wins!
One group that doesn’t get it is the editorial board of the Wall Street Journal. Listen to this unabashed MLEC bashing: “The announced vehicle, dubbed the Master-Liquidity Enhancement Conduit, will only buy highly-rated paper, to ensure investor confidence. The trouble with this theory is that investor confidence has been shaken because people no longer feel they can trust the ratings. This in turn has resulted from the fact that much of the now-dubious debt was rated not on the value of the collateral, but on the strength of the bank (such as Citibank) that issued it,” the Journal editors moan.
And they don’t stop their bitching there. Check this out: “So we’re left to wonder whether Citibank isn’t trying, in effect, to pull off the same trick twice. The conduit would issue debt and use the proceeds to buy otherwise illiquid commercial paper. But why would anyone buy the conduit’s debt? Because J.P. Morgan, Citibank and Bank of America stand behind it! And, for good measure, Hank Paulson says the consortium is doing the right thing. That’s not exactly the same as telling people the new paper is safe, but it’s not exactly a federal disclaimer, either.”
Rupert Murdoch probably made them write that. Who can you trust if you can’t trust the Wall Street Journal to back Hank Paulson’s plan to bail out Citigroup? Hey guys, Hank was appointed by George Bush. If you don’t back Hank, Hillary wins! Someone get Larry Kudlow on the phone.
What’s that? Even Larry’s a skeptic? Say it ain’t so. “Now let me get this right. Here’s my reading. At the urging of the Treasury, the big banks that couldn’t sell asset-backed commercial paper, have decided to pool their resources and create a new vehicle to do what? Sell more asset-backed commercial paper. The markets aren’t buying it. They gave it a big Bronx cheer,” he writes. Oh, how the mighty have fallen.
You know what these people aren’t noticing? That the proper name of the Entity is Master-Liquidity Enhancement Conduit. Got that? “Master.” You know what that means? That’s right. It means that it’s in charge. Get with the program. They wouldn’t call it that if it weren’t going to totally run things. The Master is all up in the credit marketz enhancing ur liquidity.
For reals.
House of Paulson? [Wall Street Journal]
More Shoes to Fall [Kudlow’s Money Blog]

Critics of ‘The Entity’ Arise

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]