Google "Sedna SIV" and you can find some priceless articles sucking up to the wonderfulness of this SIV and SIVs in general. Complete with bolded blown-up quotes from experts extolling just how cast-iron they are and triple quadruple protected against even the most violent loss-making events. The S&P PDF file (on launch) on just how great it was and how it deserves its AAA rating is also a fun read.
Quite eye-opening to see how these things were hailed as recently as 2005.
So if the junior debt is a couple ticks above default levels, where should the senior debt (commercial paper) trade? Depending on the structure of the SIV and its collateral, the paper probably trades somewhere between 50 and 80 cents on the dollar (this is an educated guess on my part since I haven't seen any quotes - I'm making an inference from levels that the debt of other distressed entities has traded at).
The money market fund managers that hold Sedna paper are going to have to update what_does_it_take_to_avoid_breaking_the_buck.xls and not in a good way.
by the way, SIVs are described as "mini banks" by these analysts now blushing furiously (I hope): mini banks built as perfect clockwork toys, or perhaps a better analogy is self-contained computer programs with just the a dab of the mothership's precious balance sheet, boasting advanced hedging techniques (so wonderful they can't be described), and launched from the fair harbors of cayman islands and other equally red-tape-free islands.
Mini unregulated banks with time-delay monetary explosions built into them, evidently.
Is there any way for us to know what is currently funding this, or any other, SIV?
I mean most were funded by short-term CP, and the bank has to fund in the event that they can't roll-over the CP. Has that already happened for this SIV? Can citi afford to fund all their SIVs when all the CP matures? I think it's safe to assume that citi's SIVs and many others will not be able to sell CP in the future.
Yoicks - 12 levels, indeed. Scary. Especially (& many thanks to the Great Tanta for walking thru the SIV construction maze - almost like a SpecOps shooting house).Sub-prime is getting to prime, both are taking commercial paper and that's impacting SIVs. Taken all together a major hurt on financial institution (banks) capital is underway but disguised. Meanwhile there's a real credit crunch building back up.
However IMHO that's not the major problemo - it's that the structural breakages and leverage impacts are spread across all these debt products and a) we're just beginning to see the tip of the dragon's nose, b) the breadth and depth is still grossly under-estimated and we've got a ways to go.
IF you'd care to see my last weeks's gathering of readings on this as well as a pointer to my view of how it ripples thru these parts of the pond to corporate debt and other markets try this:
WRFest 25Nov07(Mkts/Econ): The Bell Tolls for Thee: http://tinyurl.com/2zucvo
From the article-
"Next year ``there will be significant refinancing requirements that may need to be covered by the sale of assets.''"
So this SIV is currently funded by commercial paper. The SIV will likely be liquidated to pay back the commercial paper, and Citi will be forced to make up any losses. Is my understanding correct?
CR, when can we get some charts showing when all the SIV's CP matures?
"Alt-A Dismay
Moody's Investors Service announced it has reviewed Alt-A residential mortgage-backed securities rated in the fourth quarter of 2005 and all of 2006. "The review was prompted by deteriorating mortgage performance in pools backing transactions issued during this period, resulting from aggressive underwriting combined with a tightened lending market and prolonged home price weakness that is expected to continue," Moody's stated. As a result, it downgraded or placed on review for downgrade 1,469 securities. "
Sedna's net asset value has fallen to 54 percent, eroding nearly all the protection the downgraded ``second priority senior'' notes gets from ranking above the lowest layer of debt, Fitch said
This reminds me of the scene in "A Night to Remember" (first Titanic movie) where the designer shows the captain how the first few watertight compartments will soon fill with water, causing the bow to sink so much that the NEXT compartment will fill, and so on, until the ship sinks. Doomed.
Good thing there are enough lifeboats for everybody . . um, wait . .
On a lighter note, when I was a lad, kids used to line up pennies on the railroad tracks. After the train came through, the pennies were smashed to the size of quarters. We called them "slugs" and they could be used just like real quarters in pinball machines. AAA, risk free, 25 to 1 leverage folks. That was real financial innovation.
12 levels. 12 levels. Somebody went to the bathroom and when they came back their screen was all red? No, they "held off." And Citi? They admit they are net short this stuff. Gee, do ya think by "holding off" Fitch gave Citi the time they needed to lay this crap off on unsuspecting bagholders?
i suppose the fact that we are stunned but not surprised by this news indicates that this is a "yikes" moment undeserving of a permanent "yikes" label, but certainly deserving of a text-yikes, with an exclamation point for good measure.
Hey I just registered on Moody's to get a look at their recent activity, and it looks like there is a ton of downgrades for IB issued ABS today...anyone more familiar with the site and material able to give their impression?
Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgages started contaminating the bond market, foreshadowing losses for a broad range of investments.
Moody's may lower ratings on $105 billion worth of debt sold by structured investment vehicles after the net asset values of 20 SIVs sponsored by companies including Citigroup declined to 55 percent from 71 percent a month ago, Moody's said Friday. The assets were valued at 102 percent in June.
All of this "headwind" doesn't really matters. The economy is strong
Bush: Economic basics remain 'strong'
Says Cabinet officials making progress on mortgage woes
WASHINGTON (MarketWatch) -- Economic fundamentals remain strong despite a drag created by the housing slump and accompanying mortgage woes, President Bush said on Tuesday.
"The basics in the economy are good," Bush said in a White House news conference dominated by questions surrounding an intelligence report that found Iran had suspended a suspected program to develop nuclear weapons. "Inflation's low. Job creation's good. Interest rates are low. Productivity's up. Exports are up. In other words, the basic underpinnings of the economy are strong."
while i enjoy reading Roubini, i continue to be amazed at his solutions. perhaps he's bucking for a future administration job. when you only have a hammer, everything looks like a nail.:
"And it does not make sense to avoid bailing out the real economy and preventing a massive global loss of incomes and jobs just in order to punish reckless lenders and investors in the financial market and thus avoid moral hazard. Moral hazard in financial markets is contained via sensible credit policy and appropriate regulation and supervision of financial markets. In times of economic danger bailing out the real economy with monetary easing may have the by-product of partially reducing the financial losses of reckless lenders and investors (an indirect bailout). But the first order costs of a global recession is much larger than the second order costs of partial moral hazard; such moral hazard will be kept in check by hundreds of billions of dollars of losses that will occur regardless of monetary policy easing and via sounder regulation and supervision of financial markets in the future up-cycle of credit."
I guess with investments like that is why they would offer stuff like this:
(found today posted on another site)
"Got this offer in the Email I searched and no similiar posting
This is a 6 month Commitment to Citibank Checking Account to get $200"
Offer code is CYNA if calling by phone
Deadline for Offer is 12/31/07
Open and fund a Citibank regular checking account with $1,500 or more by 12/31/07.
Make a direct deposit or pay at least two bills online at citibankonline.com each month for three consecutive months.
Get your first $100 credited to your new checking account.
Continue making a direct deposit or pay at least 2 bills online each month for the next three consecutive months and get an additional $100.
Hey, $200 for $1500 for 6 mos., that's a better return than Abu Dhabi got!
That is bad news regarding the IB's CP. I'm in a few MM funds and all of them have IB CP. The money market funds have footnotes saying that the IB CP is collateralized by government securities. Still a cause for concern. I should have kept my slugs.
ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns, Citigroup, Merrill Lynch and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums. That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA.
If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses.
Still seems to be a lot of confidence in GS. Heck, after all this crap, they are still just off the record high. I think when they are shown to be a big house of cards (and not the funny kind) the whole edifice crumbles. That's why Hanky Panky is at the top of the Treasury. He looks like a polished turd, and GS is one. But it's all about the surface appearance, and no one will peer underneath the level 3 there to find out otherwise, else, we all head into the abyss.
I am sorry, but as an avid player of Dungeons and Dragons, losing 12 levels is pretty much the end of your character (the game only goes from 1st level to 20th level). A similar theory probably applies to World of Warcraft and other online games, though 12 levels isn't quite "game over" for them since the max level cap is so much higher.
I don't know how many levels are in this SIV game, but I am sure that there is no Greater Restoration, Wish, or Miracle spell on hand to fix this level loss!
"The basics in the economy are good. Inflation's low. Job creation's good. Interest rates are low. Productivity's up. Exports are up. In other words, the basic underpinnings of the economy are strong."
George W. Bush
December 4, 2007
"The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis."
Whether Citi will be on the hook for any of this is the $64B question. I don't know the structure of Sedna, but typically the SIVs had very limited backup liquidity facilities which is why the banks could keep them off the balance sheet in the first place. The question of whether the banks pick up the obligations comes down to whether they want to do right by their clients and whether they have the capital to do so. I think most SIV buyers thought they had some implicit understanding that the banks would support the SIVs even if the docs didn't state that.
Banks with good balance sheets and an interest in client continuity, like HSBC, are taking them on balance sheet and filling in whatever liquidity gaps arise when the CP comes due. This may also be a reflection of the quality of the paper in the SIV, and HSBC may feel their downside is limited (I have no idea, I'm just speculating).
Citi on the other hand, does not have the proverbial urn to urininate in from a capital standpoint, and even before they felt the needed to buddy up to Abu Dhabi, engaged in this utter farce known as the MLEC. All of Citi's body language has made it clear they won't touch the SIVs with a ten foot pole. Given that they have been behaving this way since well before the CDO mark to market revelation or before the liquidity sqeeze became really severe, I'm guessing that Chuck and the boys opened the lid to the SIV vault sometime in the summer, were knocked off their feet by the stench and immediately called in the haz mat team and had the area sealed off with instructions that no should be allowed within a one mile radius of the collateral. So my guess is that the bond (excuse me, bag) holders of the various Citi SIVs are on their own unless Hammerin Hank convinces Helicopter Ben to speed up the presses even more and send some of loot the MLEC account.
Think through the implications of the Sedna CP trading somewhere between 50 and 80. It is thoughts like these that motivated me to put my money in a treasury only money fund.
Geoff writes: Still seems to be a lot of confidence in GS. Heck, after all this crap, they are still just off the record high. I think when they are shown to be a big house of cards (and not the funny kind) the whole edifice crumbles.
The other possibility is that the GS team, like the Patriots, can flat out play better than the rest of the teams. Spoken, by the way, not as a Patriots fan.
GS mgmt has been publicly on record for quite some time that they were negative on the mortgage market. With that view, it is not suprising that their results look good.
I had made the (incorrect) assumption that the SIVs' creators were somehow obligated to make up any shortfall. Apparently it is more like the relationship between the GSE's and the government.
Why do you feel safe in a treasury only money fund? Although treasuries are pretty safe in the short-term, I think the SIVs' assets are worth more than the full faith and credit of the US gov.
interested: "The other possibility is that the GS team, like the Patriots, can flat out play better than the rest of the teams. Spoken, by the way, not as a Patriots fan.
"
The Patriots can be good or perhaps perfect (although I wouldn't bet on that) for a season, but eventually they lose.
12 levels is too many. Not only too many to fall, it's too many to have in the first place. In my world there are 8 levels, though in practice there are only seven since 8 is "Loss" and doesn't stay on the books. And 1 is pretty much reserved for "100% Cash or Treasury secured". With 12 levels, their scale is more accurate than their ability to measure. Heck, these days it seems they wouldn't even have a good track record with a three-level scale.
A one or maybe two-level downgrade is common enough, and can be a legitimate "the situation has changed." Downgrading more than that, especially all at once, is basically a confession that they completely goofed the initial rating.
The Federal Gov't hasn't guaranteed the SIVs and I think most of them (not sure, but I think so) lie outside of regulated depositories where the FDIC has liability. I'm more worried about what the coming FRE/FNM/FHA bailouts will cost the taxpayers. There is a lot of reason to be worried about Treasuries in a 10 or 20 year scenario, but I don't think we will completely destroy our credit in the next year or two. I'm prepared to move into the bonds of a foreign government or even to gold, but I don't think we are at that point yet. As long as you are a step ahead of the crowd running for the exits you will be OK.
This reminds me of the scene in "A Night
to Remember" (first Titanic movie) where
the designer shows the captain how the
first few watertight compartments will
soon fill with water, causing the bow to
sink so much that the NEXT
compartment will fill, and so on, until the
ship sinks. Doomed.
That's what they get for having the designer on board.
An engineer would've started flooding
the rearmost compartments in an attempt to stay level enough to avoid the catasthropic failure.
The lesson here?
Sometimes, a little intentional failure can prevent a total failure.
If they said "the whole ship would be submerged below the compartment water levels", then I'd say that's very different and the ship is going down. Saying the "bow" was going to be submerged enough for water to start flowing into the next compartment implies that tilting was the failure propagation method.
"Always when markets are in trouble, the phrases are the same: The economic situation is fundamentally sound, or simply The fundamentals are good. All who hear these words should know that something is wrong."
- J. K. Galbraith in the foreword to 1929, The Great Crash
"The basics in the economy are good"
- G. W. Bush, Dec 2007
Luckily, "fundamentals" does not form part of the current president's vocabulary.
Man looks in the abyss, there's nothing staring back at him.
Fitch didn't downgrade that debt; they took it out back and shot it.
Google "Sedna SIV" and you can find some priceless articles sucking up to the wonderfulness of this SIV and SIVs in general. Complete with bolded blown-up quotes from experts extolling just how cast-iron they are and triple quadruple protected against even the most violent loss-making events. The S&P PDF file (on launch) on just how great it was and how it deserves its AAA rating is also a fun read.
Quite eye-opening to see how these things were hailed as recently as 2005.
So if the junior debt is a couple ticks above default levels, where should the senior debt (commercial paper) trade? Depending on the structure of the SIV and its collateral, the paper probably trades somewhere between 50 and 80 cents on the dollar (this is an educated guess on my part since I haven't seen any quotes - I'm making an inference from levels that the debt of other distressed entities has traded at).
The money market fund managers that hold Sedna paper are going to have to update what_does_it_take_to_avoid_breaking_the_buck.xls and not in a good way.
by the way, SIVs are described as "mini banks" by these analysts now blushing furiously (I hope): mini banks built as perfect clockwork toys, or perhaps a better analogy is self-contained computer programs with just the a dab of the mothership's precious balance sheet, boasting advanced hedging techniques (so wonderful they can't be described), and launched from the fair harbors of cayman islands and other equally red-tape-free islands.
Mini unregulated banks with time-delay monetary explosions built into them, evidently.
Brian-
Agree! When will they start downgrading the senior det 12 levels (sounds like an AA meeting)
Also - USC has jumped on the Commerical is screwed bangwagon -
Central Valley Business Times
OT but interesting:
http://www.mercurynews.com/breakingnews/ci_7625065?nclick_check=1
"Union launches campaign for national boycott of Countrywide Bank"
Is there any way for us to know what is currently funding this, or any other, SIV?
I mean most were funded by short-term CP, and the bank has to fund in the event that they can't roll-over the CP. Has that already happened for this SIV? Can citi afford to fund all their SIVs when all the CP matures? I think it's safe to assume that citi's SIVs and many others will not be able to sell CP in the future.
Hi my name is Sedna and I have a problem with credit ratings...
Hi, Sedna!
The beginning of the end of off balance sheet duration mismatch as a business model...wish it had come sooner.
Man, they better be handing out free tubes of KY to investors in that thing.
LIBOR is down quite a bit from a year ago, isn't it? How does that relate to the credit crunch? Is it good news?
Yoicks - 12 levels, indeed. Scary. Especially (& many thanks to the Great Tanta for walking thru the SIV construction maze - almost like a SpecOps shooting house).Sub-prime is getting to prime, both are taking commercial paper and that's impacting SIVs. Taken all together a major hurt on financial institution (banks) capital is underway but disguised. Meanwhile there's a real credit crunch building back up.
However IMHO that's not the major problemo - it's that the structural breakages and leverage impacts are spread across all these debt products and a) we're just beginning to see the tip of the dragon's nose, b) the breadth and depth is still grossly under-estimated and we've got a ways to go.
IF you'd care to see my last weeks's gathering of readings on this as well as a pointer to my view of how it ripples thru these parts of the pond to corporate debt and other markets try this:
WRFest 25Nov07(Mkts/Econ): The Bell Tolls for Thee: http://tinyurl.com/2zucvo
Moody's will downgrade the rest of Citi's SIV's by the end of the week.
From the article-
"Next year ``there will be significant refinancing requirements that may need to be covered by the sale of assets.''"
So this SIV is currently funded by commercial paper. The SIV will likely be liquidated to pay back the commercial paper, and Citi will be forced to make up any losses. Is my understanding correct?
CR, when can we get some charts showing when all the SIV's CP matures?
"Alt-A Dismay
Moody's Investors Service announced it has reviewed Alt-A residential mortgage-backed securities rated in the fourth quarter of 2005 and all of 2006. "The review was prompted by deteriorating mortgage performance in pools backing transactions issued during this period, resulting from aggressive underwriting combined with a tightened lending market and prolonged home price weakness that is expected to continue," Moody's stated. As a result, it downgraded or placed on review for downgrade 1,469 securities. "
Mortgage News for Mortgage Brokers provided free | MortgageChronicle.com
Snakes and Ladders without the ladders.
Sedna's net asset value has fallen to 54 percent, eroding nearly all the protection the downgraded ``second priority senior'' notes gets from ranking above the lowest layer of debt, Fitch said
This reminds me of the scene in "A Night to Remember" (first Titanic movie) where the designer shows the captain how the first few watertight compartments will soon fill with water, causing the bow to sink so much that the NEXT compartment will fill, and so on, until the ship sinks. Doomed.
Good thing there are enough lifeboats for everybody . . um, wait . .
so IIRC, if it drops below 50%, they will have to liquidate?
On a lighter note, when I was a lad, kids used to line up pennies on the railroad tracks. After the train came through, the pennies were smashed to the size of quarters. We called them "slugs" and they could be used just like real quarters in pinball machines. AAA, risk free, 25 to 1 leverage folks. That was real financial innovation.
I thought Sedna was a trans-Neptunian object! The money the investors put in might as well be on an another solar boday, its never coming back!!
MAB,
And some residual commodity value!
12 levels. 12 levels. Somebody went to the bathroom and when they came back their screen was all red? No, they "held off." And Citi? They admit they are net short this stuff. Gee, do ya think by "holding off" Fitch gave Citi the time they needed to lay this crap off on unsuspecting bagholders?
i suppose the fact that we are stunned but not surprised by this news indicates that this is a "yikes" moment undeserving of a permanent "yikes" label, but certainly deserving of a text-yikes, with an exclamation point for good measure.
Hey I just registered on Moody's to get a look at their recent activity, and it looks like there is a ton of downgrades for IB issued ABS today...anyone more familiar with the site and material able to give their impression?
anyone more familiar with the site and material able to give their impression?
yawn.
Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgages started contaminating the bond market, foreshadowing losses for a broad range of investments.
Moody's may lower ratings on $105 billion worth of debt sold by structured investment vehicles after the net asset values of 20 SIVs sponsored by companies including Citigroup declined to 55 percent from 71 percent a month ago, Moody's said Friday. The assets were valued at 102 percent in June.
Search - Global Edition - The New York Times
MAB, I wonder if the BoD at Citi used to stick their tongues to the tracks in winter when they were kids?
Sedna was always a minor planetoid. Never a real planet.
All of this "headwind" doesn't really matters. The economy is strong
Bush: Economic basics remain 'strong'
Says Cabinet officials making progress on mortgage woes
WASHINGTON (MarketWatch) -- Economic fundamentals remain strong despite a drag created by the housing slump and accompanying mortgage woes, President Bush said on Tuesday.
"The basics in the economy are good," Bush said in a White House news conference dominated by questions surrounding an intelligence report that found Iran had suspended a suspected program to develop nuclear weapons. "Inflation's low. Job creation's good. Interest rates are low. Productivity's up. Exports are up. In other words, the basic underpinnings of the economy are strong."
lama,
I'm pretty sure those city bod types were from the other side of the tracks.
We called them "slugs" and they could be used just like real quarters in pinball machines. That was real financial innovation.
We soldered a string to a real quarter. Then we could drop it into the slot and yank it up and down for a game as many times as needed.
That was 100000+ to 1 leverage.
while i enjoy reading Roubini, i continue to be amazed at his solutions. perhaps he's bucking for a future administration job. when you only have a hammer, everything looks like a nail.:
"And it does not make sense to avoid bailing out the real economy and preventing a massive global loss of incomes and jobs just in order to punish reckless lenders and investors in the financial market and thus avoid moral hazard. Moral hazard in financial markets is contained via sensible credit policy and appropriate regulation and supervision of financial markets. In times of economic danger bailing out the real economy with monetary easing may have the by-product of partially reducing the financial losses of reckless lenders and investors (an indirect bailout). But the first order costs of a global recession is much larger than the second order costs of partial moral hazard; such moral hazard will be kept in check by hundreds of billions of dollars of losses that will occur regardless of monetary policy easing and via sounder regulation and supervision of financial markets in the future up-cycle of credit."
RGE - All Major Central Banks Should Cut Policy Rates Now to Avoid a Global Hard Landing
I guess with investments like that is why they would offer stuff like this:
(found today posted on another site)
"Got this offer in the Email I searched and no similiar posting
This is a 6 month Commitment to Citibank Checking Account to get $200"
Offer code is CYNA if calling by phone
Deadline for Offer is 12/31/07
Open and fund a Citibank regular checking account with $1,500 or more by 12/31/07.
Make a direct deposit or pay at least two bills online at citibankonline.com each month for three consecutive months.
Get your first $100 credited to your new checking account.
Continue making a direct deposit or pay at least 2 bills online each month for the next three consecutive months and get an additional $100.
Hey, $200 for $1500 for 6 mos., that's a better return than Abu Dhabi got!
Tanta,
Should I have headlined previous post:
"We're All Abu Dhabians Now!"
energycon,
That is bad news regarding the IB's CP. I'm in a few MM funds and all of them have IB CP. The money market funds have footnotes saying that the IB CP is collateralized by government securities. Still a cause for concern. I should have kept my slugs.
I am still a little perplexed.
why is ANYONE listening to the ratings agencies?
Securities can fall precipitously 12 levels just like that?
it's like an insane asylum out there...
GS and BSC getting hammered today. lucky i put a short on GS yesterday.
ACA Capital Holdings is currently trading at just 54c, down 24% on the day.
According to Barron's
:
ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns, Citigroup, Merrill Lynch and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums. That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA.
If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses.
Sorry, bad link to the Barron's ACA article. Try again:
CDO Dumping Ground Still Sinking
Market to financials "we don't trust you anymore, when you show us the crap you burried in this thing, we might be able to talk..."
Still seems to be a lot of confidence in GS. Heck, after all this crap, they are still just off the record high. I think when they are shown to be a big house of cards (and not the funny kind) the whole edifice crumbles. That's why Hanky Panky is at the top of the Treasury. He looks like a polished turd, and GS is one. But it's all about the surface appearance, and no one will peer underneath the level 3 there to find out otherwise, else, we all head into the abyss.
I wonder if the BoD at Citi used to stick their tongues to the tracks in winter when they were kids?
No, but our risk officers used to like to stick their hands down garbage disposals and "tickle" the switch.
Fun loving guys.
I am sorry, but as an avid player of Dungeons and Dragons, losing 12 levels is pretty much the end of your character (the game only goes from 1st level to 20th level). A similar theory probably applies to World of Warcraft and other online games, though 12 levels isn't quite "game over" for them since the max level cap is so much higher.
I don't know how many levels are in this SIV game, but I am sure that there is no Greater Restoration, Wish, or Miracle spell on hand to fix this level loss!
"The basics in the economy are good. Inflation's low. Job creation's good. Interest rates are low. Productivity's up. Exports are up. In other words, the basic underpinnings of the economy are strong."
George W. Bush
December 4, 2007
"The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis."
Herbert Hoover
October 24, 1929
Some things never really change.
Matt,
Whether Citi will be on the hook for any of this is the $64B question. I don't know the structure of Sedna, but typically the SIVs had very limited backup liquidity facilities which is why the banks could keep them off the balance sheet in the first place. The question of whether the banks pick up the obligations comes down to whether they want to do right by their clients and whether they have the capital to do so. I think most SIV buyers thought they had some implicit understanding that the banks would support the SIVs even if the docs didn't state that.
Banks with good balance sheets and an interest in client continuity, like HSBC, are taking them on balance sheet and filling in whatever liquidity gaps arise when the CP comes due. This may also be a reflection of the quality of the paper in the SIV, and HSBC may feel their downside is limited (I have no idea, I'm just speculating).
Citi on the other hand, does not have the proverbial urn to urininate in from a capital standpoint, and even before they felt the needed to buddy up to Abu Dhabi, engaged in this utter farce known as the MLEC. All of Citi's body language has made it clear they won't touch the SIVs with a ten foot pole. Given that they have been behaving this way since well before the CDO mark to market revelation or before the liquidity sqeeze became really severe, I'm guessing that Chuck and the boys opened the lid to the SIV vault sometime in the summer, were knocked off their feet by the stench and immediately called in the haz mat team and had the area sealed off with instructions that no should be allowed within a one mile radius of the collateral. So my guess is that the bond (excuse me, bag) holders of the various Citi SIVs are on their own unless Hammerin Hank convinces Helicopter Ben to speed up the presses even more and send some of loot the MLEC account.
Think through the implications of the Sedna CP trading somewhere between 50 and 80. It is thoughts like these that motivated me to put my money in a treasury only money fund.
Geoff writes: Still seems to be a lot of confidence in GS. Heck, after all this crap, they are still just off the record high. I think when they are shown to be a big house of cards (and not the funny kind) the whole edifice crumbles.
The other possibility is that the GS team, like the Patriots, can flat out play better than the rest of the teams. Spoken, by the way, not as a Patriots fan.
GS mgmt has been publicly on record for quite some time that they were negative on the mortgage market. With that view, it is not suprising that their results look good.
Brian-
Thanks for the reply.
I had made the (incorrect) assumption that the SIVs' creators were somehow obligated to make up any shortfall. Apparently it is more like the relationship between the GSE's and the government.
Why do you feel safe in a treasury only money fund? Although treasuries are pretty safe in the short-term, I think the SIVs' assets are worth more than the full faith and credit of the US gov.
interested: "The other possibility is that the GS team, like the Patriots, can flat out play better than the rest of the teams. Spoken, by the way, not as a Patriots fan.
"
The Patriots can be good or perhaps perfect (although I wouldn't bet on that) for a season, but eventually they lose.
12 levels is too many. Not only too many to fall, it's too many to have in the first place. In my world there are 8 levels, though in practice there are only seven since 8 is "Loss" and doesn't stay on the books. And 1 is pretty much reserved for "100% Cash or Treasury secured". With 12 levels, their scale is more accurate than their ability to measure. Heck, these days it seems they wouldn't even have a good track record with a three-level scale.
A one or maybe two-level downgrade is common enough, and can be a legitimate "the situation has changed." Downgrading more than that, especially all at once, is basically a confession that they completely goofed the initial rating.
Matt,
The Federal Gov't hasn't guaranteed the SIVs and I think most of them (not sure, but I think so) lie outside of regulated depositories where the FDIC has liability. I'm more worried about what the coming FRE/FNM/FHA bailouts will cost the taxpayers. There is a lot of reason to be worried about Treasuries in a 10 or 20 year scenario, but I don't think we will completely destroy our credit in the next year or two. I'm prepared to move into the bonds of a foreign government or even to gold, but I don't think we are at that point yet. As long as you are a step ahead of the crowd running for the exits you will be OK.
That's what they get for having the designer on board.
An engineer would've started flooding
the rearmost compartments in an attempt to stay level enough to avoid the catasthropic failure.
The lesson here?
Sometimes, a little intentional failure can prevent a total failure.
And before anyone bothers me about it....
If they said "the whole ship would be submerged below the compartment water levels", then I'd say that's very different and the ship is going down. Saying the "bow" was going to be submerged enough for water to start flowing into the next compartment implies that tilting was the failure propagation method.
"Always when markets are in trouble, the phrases are the same: The economic situation is fundamentally sound, or simply The fundamentals are good. All who hear these words should know that something is wrong."
- J. K. Galbraith in the foreword to 1929, The Great Crash
"The basics in the economy are good"
- G. W. Bush, Dec 2007
Luckily, "fundamentals" does not form part of the current president's vocabulary.
I think this really sums it up. Email from a friend who has been an Investment Banker with Citi for 35+ years:
2 sub grades is a surprise. 12, I have never seen.