Tuesday, October 21, 2008

Revenge of the SIV

(FT Alphaville) Bloomberg reports on a market-easing operation put in place today by the Fed:

The Federal Reserve invoked emergency authority to purchase assets from money-market mutual funds that are having difficulty meeting redemptions from their investors. “The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests,'’ the Fed said in a statement released in Washington today. The new program “should improve the liquidity position of money market investors.'’

Take a look at the term sheet (emphasis ours):

The MMIFF is intended to help restore liquidity to the money markets. The MMIFF will be a credit facility provided by the Federal Reserve to a series of special purpose vehicles established by the private sector (PSPVs) in accordance with the terms described below. Each PSPV will purchase eligible money market instruments from eligible investors using financing from the MMIFF and from the issuance of asset-backed commercial paper (ABCP). The MMIFF is authorized under section 13(3) of the Federal Reserve Act.

Forget the “MMIFF”, this is the return - the revenge - of the SIV.

The “private” in “private special purpose vehicles” being “bank”.

To boil the proposals down: the Fed is going to provide senior funding so that banks can reincarnate the SIV and then use said reincarnations to bail out money market funds. A goal the SIVs will achieve by buying assets from the funds. Assets like bank commercial paper.

Banks running funds buying bank debt. What a strange circle. Sounds familiar.

It gets stranger. Not only will the new mmiffy SIVs be buying CP, they’ll also be doing so by issuing CP. Is it fair to call this ABCP? Perhaps instead CPCP. Stranger still, MM funds selling assets to the SIVs will be forced to buy a portion of the short-term paper issued by the SIVs to buy those assets in the first place:

The PSPV will issue to the seller of the eligible asset ABCP equal to 10 percent of the asset’s purchase price.

Cannibal funding.

Still with us?

Meanwhile, the New York Fed will backstop the new SIVs:

The Federal Reserve Bank of New York (FRBNY) will commit to lend to each PSPV 90 percent of the purchase price of each eligible asset until the maturity of the asset. The FRBNY loans will be on an overnight basis and at the primary credit rate. The loans will be senior to the ABCP, with recourse to the PSPV, and secured by all the assets of the PSPV.

Product of one final stroke of genius: Wanting, presumably, to replicate the inglorious halcyon days of the SIV in all their August-’07 glory, the Fed has written into the scheme a couple of potential collapse triggers:

If the debt instruments of a financial institution held by a PSPV are no longer eligible assets due to a short-term debt rating downgrade, the PSPV must cease all asset purchases until all of the PSPV’s assets issued by that financial institution have matured.

Upon a default of any asset held by a PSPV, the PSPV must cease all asset purchases and repayments on outstanding ABCP. Proceeds from maturation of the PSPV’s assets will be used to repay the FRBNY and, upon maturation of all assets in the PSPV, any remaining available cash will then be used to repay principal and interest on the ABCP.

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