The idea – to create a fund to support liquidity in the market for housing-related securities – was killed off late on Friday when the banks behind the scheme abandoned it after other financial institutions showed little interest.
The former Goldman Sachs duo of Hank Paulson, the Treasury secretary, and Robert Steel, the undersecretary for domestic finance, helped to broker the original agreement to create the fund. The idea was to allow managers of structured investment vehicles (SIVs) and conduits unable to obtain refinancing from investors to run down holdings in an orderly manner without a fire sale of assets.
At the time the plan was unveiled people involved talked in the region of $75bn–$100bn (€52bn–€70bn, £39bn–£50bn). But by the time the banks trying to create the fund – Citigroup, Bank of America and JP Morgan Chase – and asset manager BlackRock pulled the plug, expectations had fallen to less than half of that amount.
As rumours spread that the deal was to be shelved, the reaction in the money market was relief. Peter Crane, of Crane Data, told Reuters: “It is akin to not having to use your insurance policy – the reasons for the fund have gone away.”
The US Treasury always emphasised the plan was a private sector initiative and was not intended to preclude other restructuring efforts. However, officials took credit for convening the negotiations that led to the agreement. A former administration official said the supersiv had been in trouble from the start, with many in the markets deeply sceptical. The Federal Reserve failed to offer public support, while Alan Greenspan, former Fed chairman, voiced concerns.
European policymakers were doubtful as to whether it would work. With the US Treasury holding back for fear of giving the impression that it was a government plan, no one explained fully what its purpose was and how it would operate. Such a fund could not be set up overnight and negotiations were complicated by the turmoil in the top ranks of the US banking industry.
In the event, the supersiv was overtaken by events. Managers of SIVs and conduits unable to wait for it found other ways to dispose of assets. SIV assets fell from $340bn this summer to $265bn in early December.
Citigroup announced that it was taking $49bn of its SIV assets on to its balance sheet, following similar moves by HSBC and others.
In a statement, the Treasury said it welcomed these alternative “bilateral” efforts to enhance liquidity in the credit markets.
Mr Paulson is now focusing his efforts on selling the other deal he brokered – to freeze the interest rates on some subprime loans and fast-track others for refinancing. This time the Fed is visibly behind the scheme.
People involved in the supersiv fund said the decision to pull the offer reflected a lack of interest, which become clear last week as banks announced deals which led to injections of capital, giving them greater capacity to absorb assets on balance sheet.
“The vehicle is not needed at this time,” Bank of America, Citigroup and JP Morgan Chase said in a joint statement.