Launching the Super SIV - Getting the Big Things Right
Call it an 80% solution. Call it what you will. Getting a pooled liquidity vehicle up and running - now - is far more important than waiting for consensus via “group grope” and maybe never getting it off the ground. The intended benefits of the Super SIV (or M-LEC) are pretty straightforward, but the optimization process that was being used to try and elicit support for the vehicle just wasn’t working. The sheer scale and complexity of the monster vehicle was causing a form of “analysis paralysis,” with each and every constituency weighing in as to what they needed in order to participate. Instead, and likely with the prodding of Treasury, they settled on a more simple, straight-forward answer in order to get moving and to begin enjoying some of the benefits of its operation. From today’s New York Times:
The country’s three biggest banks have reached agreement on the
structure of a backup fund of at least $75 billion to help stabilize
credit markets, a person involved in the discussions said yesterday,
ending nearly two months of complicated negotiations against a
worsening economic backdrop.Officials from Bank of America, Citigroup and JPMorgan Chase
reached agreement late Friday, settling on a more simplified structure
than had been proposed, said this person, granted anonymity because he
was not authorized to talk for the group.
In all of the comments and sound bites around the Super SIV vehicle, Treasury Secretary Paulson’s messaging has evolved to sound a lot like, well, mine. From today’s NYT:
Now, Henry M. Paulson Jr.,
the Treasury secretary, is describing the proposal’s benefits as
helping “at the margin.” In an interview on Thursday, before the latest
agreement was made, he acknowledged that the proposed backup fund would
not rescue troubled SIVs, only lead to a longer and more orderly demise.“This
is something that is not a savior,” Mr. Paulson said, noting that he
expected the fund to begin operating by the end of the year. “Anything
at the margin that will speed up liquidity is worth trying.”The
fund’s organizers say it is intended to avoid a severe credit market
disruption. The hope is that it will allow time for asset prices to
recover, although most market analysts call that improbable. More
likely, it will discourage SIVs from dumping their holdings all at
once, causing securities prices to plummet.
Right. Not a panacea. Ultimate benefits uncertain. But certainly worth a try. Anything at this point that can enhance liquidity is a good thing, an important thing. This is a blurb from a post I wrote about a month ago:
the M-LEC structure does buy time for the markets to become more
orderly, for some liquidity to creep back in, and for a near-term
crisis to be averted. But it doesn’t change the fact that lots of
really bad loans were made, and lots of securities were sold backed by
these really bad loans, and real investors and real people will incur
over $100 billion of real losses when the dust settles, even in the
best of circumstances. And it is going to be the magnitude of the
losses, where these losses reside and how they are absorbed that will
ultimately determine the damage to both Wall Street and Main Street
communities.
And this is from a post I wrote about three weeks ago:
I think the real question is if the M-LEC has enough positives to make
it worthwhile relative to the unknowns. As it introduces friction, it
costs money to assemble for participating firms, especially those
selling assets into the vehicle. And as noted above, it doesn’t
directly solve any fundamental credit problems. But it does create a
ready market for high-quality SIV assets, in size, that streamlines the
operational process of generating liquidity relative to selling
discrete assets to many, many buyers. And it does provide an
opportunity for market conditions to improve, possibly enabling some of
the currently distressed paper to recover. And the part that doesn’t,
the banks will take some lumps. Lumps that they deserve to take. So net
net, it might be worth a go.
Now is a time for action. The reality is that the interconnect nature of our Wall Street and Main Street communities makes the fortunes of banks vitally important to the fortunes of all our citizenry. And while Mr. Market will ultimately determine the value of these and all other financial assets out there, a structure that helps ease the tightness of today’s credit markets can only inure to the benefit of us all.
