Friday, December 21, 2007

US banks scrap plans for SIV ‘superfund’

(Financial Times) The US Treasury-backed $75bn “superfund” planned by the top three US banks was scrapped on Friday after lack of interest from other banks in providing financial support.

The banks also faced waning interest from cash-strapped structured investment vehicles (SIVs) in selling assets to the fund, according to someone close to the plan.

The fund, which was to be managed by BlackRock, was proposed by the banks with the encouragement of the Treasury two months ago amid fears of possible fire sales of assets by SIVs.

Such sales could cause further dislocation in the credit markets and threaten money market funds, which are the main investors in SIV commercial paper.

The plan was met with scepticism and the need for the fund has receded as many SIV managers have shored up their finances.

Citigroup, one of the banks backing the fund along with Bank of America and JPMorgan Chase, said last week it would take SIVs with $49bn of assets on to its balance sheet.

Nevertheless, the banks this week restated their commitment to go ahead with the plan. The banks and the Treasury are expected to say that the plan for a “buyer of last resort” for SIV assets was worth pursuing and was only ever conceived as one of several possible options.

But it may be seen as a setback for Hank Paulson, the Treasury secretary, who publicly backed the plan and insisted that it would go ahead.

SIVs, which sell cheap, short-term debt to invest in higher-yield, longer-term assets, have been at the centre of the liquidity squeeze as investors ditch exposure to anything that could be tainted by subprime mortgages.

Participants in Canada’s non-bank asset-backed commercial paper (ABCP) market were on the verge late on Friday of announcing a restructuring of 21 highly leveraged trusts, or conduits, which have been frozen since August.

The deal, covering close to C$35bn ($35.3bn) in assets, is understood to include major investors in the trusts, as well as more than a dozen Canadian and foreign banks. Under the restructuring proposal, the asset-backed commercial paper would be converted into longer-term securities with maturities of about seven years.

The foreign banks include Deutsche Bank, HSBC and ABN Amro. Their involvement stems from packages of credit default swaps that they sold to the conduits, giving them the right to make margin calls if the value of the assets declines.

The Canadian banks have been asked to help back-stop a credit facility that would enable investors to meet such margin calls. The Canadian finance minister and the governor of the Bank of Canada have taken an active, behind-the-scenes role, seeking to convince the banks that their participation is in the interest of market stability.

The Canadian ABCP market seized up when issuers were unable to roll over maturing paper as a result of turmoil in the US subprime market, investors’ diminishing appetite for risk, and the failure of emergency liquidity provisions in some ABCP issues.

Most major participants agreed to a standstill on liquidating assets and on lawsuits until Jan 31.

But investors have already taken sizeable writedowns on their holdings.

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