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One SIV To Rule Them AllWhen Bankers Collude, Who Wins?

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"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." --Adam Smith
We’re back from Shreveport, Louisiana, and just catching up on things after a few days in the land of cotton, oil rigs and riverboat slot machines. Bess levin will shortly report with the latest on Chuck Prince and his loyal board of directors. We’re also looking into all those stories on the anniversary of Black Monday, catching up on the layoff rumors, following the Nobel prize news, trying to repair our television so we can tune into the first day of Fox Business (we suspect it was sabotaged by CNBC) and wondering what’s happening with Northern Rock. (Feel free to drop us a note—in comments below or an email to—on any stories, rumors or half-assed theories you think we should be writing about.) Eventually we’ll report on our adventures in Shreveport, and what we learned about the future of gambling. But let’s start out with this Treasury department led bailout of Citigroup plan to enhance credit market liquidity through bank collusion cooperation.
As it turns out, the solution to the troubles some of the world’s largest banks have run into with their structuredinvestment vehicles—often called conduits—is…another structured investment vehicle. A structured investment vehicle to end all structured investment vehicles. Or, at least, backstop them.
Some of the worlds biggest banks—including Citigroup, Bank of America. and JPMorgan Chase –are teaming up to prevent SIVs from having to dump assets into the market. The banks have been unable to refinance the SIVs to pay off investors, and have been loath to sell the assets into an arid credit market, for fear that they will further depress prices for the short term debt they hold. This would have the effect of possibly forcing the banks to further downgrade the value of other short term assets they hold more directly and might further reduce demand by scaring off investors.
One solution would be for the banks to take the SIVs onto their books, essentially bailing them out. They want to avoid this at all costs after already having suffered major losses in the credit markets. It has also created a kind of prisoners dilemma, where some banks are hesitant to take the SIVs on book for fear other banks might dump the assets into the market.
The Treasury Department organized a way out of this dilemma: cooperation. Secretary Hank Paulson and Robert Steel put together a series of meetings of the big players to help them organize a cooperation solution. And the result is a Super SIV, another off-balance sheet vehicle funded by the banks that will buy up the assets of the troubled SIVs.
The move is being criticized as a bailout of Citigroup, in particular, and of the banks which started the SIVs in general. People are making comparisons to Long-Term Capital. The lead critic seems to be John Malkin, a principal at Caxton Associates who has said the plan “stinks.”
Interestingly, neither Bank of America nor JPMorgan Chase have SIVs under their aegis. So what’s in it for them? Allegedly, they are in it for the fees. Citi, BofA and JP Morgan all stand to make money from fees for starting the Super SIV. But we’re also hearing from anonymous sources that both JP Morgan Chase and Bank of America were worried about broader credit market fall-out from a SIV-asset dump, and this helped make them eager participants in the Super SIV.
Credit market innovator Charles Ponzi could not be reached for comment.
We’re still studying the details, and plan to round up reactions from everyone. Developing, as they say…