From today’s New York Times:
Three of the nation’s largest banks, working together at the behest of the Treasury Department, announced this morning that they were creating a large fund to serve as a buyer of bonds and other debt at a time when many investors are avoiding them.
Citigroup, Bank of America and JPMorgan Chase will create a fund, called a conduit, that will be able to buy around $75 billion to $100 billion in highly rated bonds and other debt from structured investment vehicles, or SIVs. Those vehicles own mortgage-backed bonds and other securities and have had trouble obtaining financing since early August, when the credit markets froze up.
It is interesting to note that these funds are not that different from funds maintained by J.P. Morgan for similar purposes in earlier times.
More here:
To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings — AAA and AA — and debt that is backed by other mortgages, credit card receipts and other assets.
Each bank will put up an unspecified amount of its own capital into the fund, and other banks from around the world are expected to join the consortium in the coming weeks. The conduit will raise most of its money by selling commercial paper, which is a form of short-term debt like Treasury bills but is issued by banks, corporations and investment vehicles.
The conduit will pay market prices for the securities it buys. But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.
Read the full article here.
{ 5 comments }
… so why are these 3 banks doing this ?
Why is the Treasury Dept doing this via the banks ?
What should average American citizens conclude about it ?
{Note that the referenced ‘full article’ is behind a subscription firewall}
This “superconduit” (WSJ) seems to be the idea of Citi. It appears that Citi pitched it to Paulson who bought in to this. Note that Citi is Robert Rubin of Clinton Administration fame.
The whole idea is to create a fund to cover SIVs that are not on Citi’s books. Now there are three banks involved, Morgan, BOA and Citi but Citi is the only one with SIVs. So the fund appears to only benefit Citi. Morgan and BOA have been promised commissions and broker fees, but from whom? Their involvement seems more a cover for the alliance between Citi and Treasury than anything else.
The deal is still a little mirky but it appears that Treasury is guaranteeing the fund to keep the questionable paper off of Citi’s books.
This doesn’t pass the smell test for me.
“a conduit, that will be able to buy around $75 billion to $100 billion in highly rated bonds and other debt from structured investment vehicles”
And they’ll pay you a 10% transaction fee if you give them your bank account number…
DickF is on the right track. Keep in mind that all 3: JPM, BOA, & C are major derivative dealers/holders.
The ‘Superconduit’ schema should add additional/much needed liquidity to that marketplace, as a whole.
Also, using these banks as ‘beards’ helps deflect the charge of ‘Government Bailout’.
Some have shown an interest in this issue so let me share some insight from a friend.
I think the market is beginning to realize that there is something seriously wrong with this deal….and with Citibank.
The extent of the SIV exposure that Citibank holds is serious. Essentially it created structured investment vehicles, ‘SIV’s', that were set up off balance sheet to avoid Basel Capital rules so they could be leveraged at 10 to 15 times. The SIV’s borrowed short term commercial paper…from Citi other banks and hedge funds and then invested those ‘promissory notes’ in riskier, longer term paper, usually Asset Backed Securities..backed by mortgages, credit cards, student loans.
The commercial paper is generally 90 day paper and much of the paper is coming due in November. Previously the SIV would roll the paper over and trade its longer term ASB bonds as needed. Presently they can’t roll over the paper, CP, and they can’t sell the ASBs…so they are illiquid and depending on the quality of the ASB bonds, potentially insolvent.
Citi is the largest U.S. sponsor of these vehicles in the U.S. but Barcleys and HSBC are up to their necks in these vehicles in Europe. One fear is that if these are not bailed out before Nov. they will race to dump ASB assets…as the first in will get the higher prices, even in a distress market, and as the others are forced to liquidate the ASB’s they will get less and less. If Banks like Citi had to take these assets back on their books in this sort of liquidation it would have to take losses of more than 80B on top of the 20B it already took. Total losses to banks on these SIV’s would be more than 200B.
What makes matters worse is that these SIV’s have been carried from the August freeze up to this point on the back of the Fed. Discount funds were made available and section 23A of the banking act was suspended to allow Citi and others to lend discount money out to the SIV’s (Sec. 23A otherwise prohibits lending more than 10% of Bank capital to related non bank entities). By some reports banks have made loans approaching 35% of capital to such entities.
The super fund deal is designed to move these troubled assets out in time and keep them off the market so the Banks do not have to take the losses and write down their capital reserves. Basic idea is to push this out till late next year and hope for the best.
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