It would be great if the banks socialized their losses between each other but I do not have my hopes up.

When the Bear Stearns hedge fund(s) blew up in late spring, Wall St pressured Bear into coming up with a plan to inject capital to shore up the fund. The plan was to make sure that market prices weren't seen on the assets that Bear held, because of the panic that would ensue once everyone had to mark their assets to market. This "super conduit" is that strategy all over again on a larger scale. The problem, again, is that the injection of capital doesn't change the underlying, deteriorating asset.

iceman, but how does this then help Citi? They report on Monday next week. Citi is the one with the largest exposure and if plans requires an injection of capital, where does it come from and if its shared conduit, who's the administrator I have to wonder.

okay, then...when will the shares be listed...I'm in for 100 shares - what ever the price...more kool aid

"I wonder if one of the big banks is closer than we know to some really serious trouble. What would happen to the landscape if one of those guys were to fail. Perhaps in that case it would be in all of their interests to prop up the ailing bank any way they could. With Treasury as the mediator."

I would have to think, yes, quite likely. Afterall, someone in the Treasury dept clearly thought setting this up was necessary. So, they saw something that prompted them to take such a drastic and unusual measure..what was that something. Offloading risk from Citi and trying to conceal it to protect Citi would certainly be near the top of my list of reasons.

"That sure is a nice global economic system you've got there. Be a shame if anything HAPPENED to it.

Want to join M-LEC? I really think you ought to join M-LEC."

So is this just some $100 billion shell game where Citi gets to distribute its risk across the other institutions in order to delay the ol' mark-to-market?

Also, other than jawboning, what precisely is Treasury's role?

Monday should be interesting.

The WSJ article is behind the pay filter but there is a lengthy article on Bloomberg:

U.S. Treasury Talks With Banks on Commercial Paper (Update3) - Bloomberg.com

Try as I might to see how this fixed things, I'm still stuck at the fundamentals : people were lent money that they can't pay back. The guys who lent them money are out of pocket. They(or some other schmuck ) has to take their lumps. And so people have got wary about buying this stuff - fool me once and all that - no wonder !
They keep talking about the spillover ( into commercial paper, into the LBO loan hangups ) but the central fact is NOT going to change.

These machinations are amazing. Bloody headless chickens; I saw this behavior in slow motion and with deep insight and involvment into a particular business segment(Office Systems based on ALL-IN-1 on VAX computers run on VMS operating systems communicating via DECNET supporting DEC printers with DEC's RDB database software and DEC's disk drives and.. you get the point) when standardized WINTEL and opensource Unix was eating DEC's lunch in proprietary and EXPENSIVE VAX(en) servers and VMS operating system and dumb terminals not PCs as the output device - people simply refused to take their lumps.

But they still had to in the end.

-K

The Deal of the Century!

wow, this is dangerous! could this be that black swan that tanks the stock mkt? we'll see, since the big boys are obviously in some big trouble.

i'm afraid since Paulsen is involved this means all of us taxpayers will once again pay for all of this. what is a bank anyway? technically a depository institution with OUR deposits backing everything. the bankers play with our money, fractionalize it, leverage it, derivatize it and squander it. guarantee you they will find a way for us to pay for it also.

where are the cops?

why does this remind me of the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund?

You know we have not heard one word from former FDIC Chairman Don Powell. Heck of a job Donnie!

from the FT article-"This could then help ease the liquidity squeeze in the short-term debt markets by easing fears that any such vehicle could implode, hitting the rest of the market."

once again, moral hazard. it prevents the weakest most irresponsible SIVS/banks from imploding and exiting the mkt place as they should. a few of these implosions would put a healthy fear into the rest to shape up. allowing these criminals to dump all their toxic waste into one large dumpster at taxpayer expense is immoral. it would be like creating another Fannie Mae.

Is it a coincidence that this "could" get announced the same day as Citi's Q3 earnings?

i think its important to tie this development in with what else has happened in the mkt today. those dropping ABX indices indicate further perceptual loss in value of these CDO's, i.e. hedge funds and even IB's (GS) shorting them.

also my small bank shorts DSL, FHN, BKUNA diving into the close tells me the mkt wonders what will happen to the little banks that don't have access to a super conduit like this.

the RKH regional bank etf also dropping severely.

this all adds up to trouble straight ahead.

It would be interesting to know who will manage this thing and what the rules will be. One can imagine that many banks will try to unload their worst garbage on the fund. Who will do the valuation? If the big banks get to run it, look for a lot of small bank failures.

For those of you who are unaware, the fed has been pushing bank consolidations for twenty years. The end result will be only four or five banks-"mega banks"-in the US. These are not my words, but the words of the Richmond fed president in 1987. What a way to distribute risk.

Now, we're reaping the whirlwind. Citi hasn't been a "bank" in almost thirty years. It's a floating crap game guided by the "too big to fail" doctrine. Citi's last "savior" was a Saudi prince. The sons of bitches will be bailed out yet again, even though the appropriate response would be to bust them up.

MOM

what is GF?

GF = Greater Fool, I think.

Must Leverage Ever Cent

Branson unveils team to buy Rock
FT.com / Financials - Branson unveils team to buy Rock

The proposal would see the failed mortgage lender rebranded as Virgin Money.

If the MLEC acronym is fertile ground for pun and parody, I can't wait to see what happens to Virgin Money.

Arbitrage their way to the top of the bucket of crabs

MOM,

This is the best visual yet. Reminds me of the Far Side where the two fish are talking in the fishbowl:

"Well, I guess Louie made it!"

Of course, what's left of Louie is on the floor...

Anon 1:56 The problem is that pooling doesn't work for well correlated risk. The entire debt market is in varying degrees of trouble. I think that we are getting to the point where there simply isn't enough floatation left in the parts that are still functioning to keep the worst parts from sinking. Adding more obfscution and reducing transparancy will not save the insolovent. Better to let them fail and then look around and see who IS solvent.

In my little mind there is a distinction between market seizure and insolvency. Even if we allow the market to seize up and, those who are actually solvent will survive. The banks won't be able to sell bonds and will be stuck with peir loans. But then it will slowly become obvious whose loans are good, and being slowly repaid, versus those who have made loans with insufficient asset backing.

The problem is, of course, that the fallout from a bond market collapse would cause many loans to go bad who otherwise would have had no difficulty paying off their loans. But it is difficult for regulators, to distinguish between LBO crap that is dependent on the hiding and resale of structural debt, and bonds used for the purchase of plant and equipment that will turn out to be a bad idea in the face of a credit contraction caused recession. We have to rely upon those who are directly involved with the borrowers to make those determinations. The only way to incentivise that sort of distinction on the part of lenders is to force them, through occasional bond market failures to hold onto the loans that they have made. Allowing them to hide in SIVs those that they can't foist onto the bond market is NOT helpful in the long run.

Idoc - the Fed is clearly facilitating things according to the articles I've read.

If you look at this link  you can see all the letters for the Reg W exemptions this year. Friday's Citi ruling is here. Deutsche Bank got the same 30% exemption on 9/12. So since the turmoil, DB, Citi, BofA & JPM Chase all got clearance to go to 30% aggregate lending to affiliates instead of 20%, ON THE BASIS of overcollateralization. All of these exemptions were granted in the public interest.

The Fed needs to have some exit method. Reg W limits the amount of lending to non-bank affiliates, and those exemptions were intended to be temporary contemporaneously with the discount window arrangement. (stated in the letters.) Given that the discount window MBS pledge had an initial 30 day borrower renewable, I suspect the Fed was thinking 3 months. In any case, it's a good bet that the required overcollateralization is ebbing given the latest sets of writedowns and downgrades.

Without something like this arrangement, how can those banks get back to SOP?

"why are many of you such conspiracy theorists?"

is this Sebastian who just posted as Anonymous?

the ppl on this blog tend to be intellectually curious people who just would like to know whats going on in the financial world esp. when it effects their pocketbook? the real question is why is Wall St so secretive?

the problem is that wall st and our gov't have earned its reputation by engaging in nefarious and secretive activities. we just want to know whats happenin. we also like to draw out possibilities and conclusions. all of this has been made possible with the connectivity of the internet on a scale of unprecedented proportions. the PTB are just now figuring out just how powerful this is for the little guys.

MOM

we are basically on the same page with this with just a small distinction.

i don't think anyone out there is pressuring the Fed to reverse its Reg W exemptions. as far as i can tell, they could leave them out there forever just like they seem to have by cutting reserve requirements, opening the discount window, cutting the discount and FFR rate, increasing the type of collateral they'll accept.

i read something last month about the B of J lowering themselves to outright purchases of real estate and mortgage loans and all sorts of other junk to save the banks in the system. i think this might be what we're headed toward.

idoc - There is some similarity to the Japanese approach, as Preserve stated. However, a similar approach was used to deal with LTCM. It worked, but at least one of the arguments made in this 1999 Cato Institute paper about that approach now seems prescient:
The intervention also is having more serious long-term consequences: it encourages more calls for the regulation of hedge-fund activity, which may drive such activity further offshore; it implies a major open-ended extension of Federal Reserve responsibilities, without any congressional authorization; it implies a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encourages irresponsible risk taking; and it undermines the moral authority of Fed policymakers in their efforts to encourage their counterparts in other countries to persevere with the difficult process of economic liberalization.

The other thing financial entities are doing is giving loans to people to buy this stuff from them. I think that is actually less in the public interest.

I do not know what would have happened if LTCM had been permitted to collapse. I do not know what will happen if the Fed does not continue on its current path.

I do feel that the failure to intervene earlier to impose rationality on a market that had lost its collective marbles with this stuff, probably reinforced by the idea that when the day of reckoning came, the Fed would be there, is the worst of all possible frameworks for these markets. I have no problem with FDIC insurance, but insured institutions must be regulated. You cannot guarantee result AND abandon regulation.

The reality is that a huge crash will probably injure the bottom level victims of this (those poor suckers who bought inflated homes) more than it will injure the large institutions. However, the citizens of this country should now be asking for a better system of regulation for these types of broader financial markets that impact consumer lending.

Citi made so many bad bets and have such huge positions in these bad bets, they could have the superconduit come through and still lose a couple of billion this quarter.

SIV
bridge loans
CDO
ABCP
MBS
LMNOP

you name it, they bet wrong.

Chuck Prince has to fall on his sword for this, I'm waiting until december before I think about wading in. If they're still around at that point, maybe I'll take a flutter.

*OT, but what was with the equity volumes Friday? DJIA moves up on middling at best volume, while NASDAQ move up twice as much on twice the volume.

Alec

the "invisible hand" is the only one interested in saving the Dow/SP while all the mo mo players are going after the big returns and what has worked in tech.

Idoc i don't think anyone out there is pressuring the Fed to reverse its Reg W exemptions. as far as i can tell, they could leave them out there forever just like they seem to have by cutting reserve requirements, opening the discount window, cutting the discount and FFR rate, increasing the type of collateral they'll accept.

Okay, but all of these measures were intended to be temporary, as stated in the letters. It's true that the Fed does have the statutory authority to make exceptions in the public interest from aggregate affiliate lending limits under Reg W, but there must be some legal limit to that. Obviously the legislative intent in allowing the BHC scope to bank holding companies but curtailing exposures was to prevent exactly the current situation of massive interdependencies from coming about.

If it converts from a temporary measure to a structural measure (as it did in Japan), I can imagine a case from some aggrieved investor going right to the Supreme Court 4 or 5 years from now. All agencies defend their scope and authority, and one of the ways that they do so is by not provoking Congress. So I believe the pressure on the Fed is sui generis. It does not like the position it is in and seeks a way out while still fulfilling its mandate to ensure liquidity.

According to the FT, SIV's also include some hedge fund financing. FT.com / UK - SIVs forced into deleveraging as sector sees few signs of recovery

Now I have to wonder who will be the lender of last resort if the $100Bil-bailout goes south. The FDIC?

The FIRE has made a mess of this economy.

KD,

What idoc said - fighting human nature is like fighting the tape - soemtimes you HAVE to do it but know your odds!

Keep up the good work, Karl.

http://www.tradingmarkets.com/.site/news/Stock%20News/698263/

excerpts:

Pulte Homes is trying to combat the housing slump with a Halloween-themed "monster" sale at seven Maryland communities

"The homebuilder, one of the nation's largest, hopes to entice buyers frightened by plummeting sales"

"We figure this is an appropriate treat for homebuyers who may find market conditions a little spooky right now," wrote Melanie Hearsch, a spokeswoman in Pulte's corporate office"

Monsters, frightened, and spooky describe the situation pretty well.

Idoc - I think a central bank is a necessity in modern economies. Also, centuries of experience have proven that the basic tendency of human nature toward profitable lying dictates that the only truly free markets (knowing trades conducted by fully informed and uncompelled parties) are markets regulated to demand truth, check for truth and imposed penalties for lying.

At this point, I am with Tanta. I feel that Tanta's approach of looking at the underlying transactions throws a bright light on the problems and thus illuminates the potential regulatory solutions.

The role of the ratings firms (Nationally Recognized Statistical Ratings Organizations or NRSROs in regulator-speak) is key here. They are the ones that put their stamp of authority on these "investment grade" securities backed by some extremely flimsy paper. It would appear that if such firms are to be granted semi-official authority, they too must come under some sort of third-party scrutiny.

Pictured when reading the article:

Con artist on the street corner working the "Shell game"

.

Stuart- well stated

MOM-we wouldn't have this mess if the mkt was free to establish interest rates. the Fed has kept them too low for too long. precisely b/c of political pressure the Fed can't allow the necessary economic pain which self regulates the system.

Greenspan himself said if we were still on the gold std we wouldn't need a Fed. quite a stmt from the Man himself. b/c rates have been too low, all the primary dealers gorge themselves on cheap money which has allowed them to create all these trillion dollar tornadoes which are bearing down on the house as we speak. derivatives, mortgages, SIV's, etc.

its difficult to imagine life w/o what you've grown up with, its so abstract. but from what i've read this single move, IMO, would help solve LOTS of problems.

The outrage here is the obfuscation of exposure and Enronesque accounting. The Fed essentially stated that some banks hold undeclared liabilities. Perhaps some folks should be going to prison.

I presume the Fed can't take SIV assets at the discount window, because they're not on the bank's balance sheet.

does anyone know why we haven't yet marked to mkt much of this crap?

i have seen numerous reports of forced selling of assets by hedge funds, SIVS, & banks like this TPG Axon. why hasn't this at the margin selling reset prices fully downward in the general mkt?

Citibank Earnings Preview from Sekking Alpha's Todd Sullivan

Citigroup Earnings Preview -- Seeking Alpha

psychodave:

Thank you for the link; very interesting! From there I found the <a href="http://www.frbdiscountwindow.org/cfaq.cfm?hdrID=21&dtlID=90#c5>Discount Window Collateral FAQ:

May a depository institution pledge a structured debt obligation containing sub-prime mortgages in the underlying collateral?

Debt obligations containing subprime mortgages are acceptable as collateral if they meet Reserve Bank eligibility requirements, including credit quality and tranche type. AAA-rated collateralized debt and mortgage obligations are examples of eligible structured debt obligations.

It still sounds to me like BBB tranches, for example, are not eligible (yet). But this is broader than I knew, and it certainly bears watching.

Allen C:

You are probably right. The SIVs themselves are not depositary institutions and are therefore ineligible to borrow at the discount window. The Fed could change this at any time, of course.

Sebastian's Mutha:

I think it is very dangerous to try to play this in the market. There is simply too much money at stake, and you risk getting caught in the cross-fire. The days when "investor sentiment" actually determined stock prices are long gone.

I would go neither long NOR short anything related to this story.

why can't we let some of these banks go BK? the survivors will easily make up for them. - idoc

And there is a middle road too, allow the banks to take such a HUGE hit so as to wipe out their equity then let Treasurty, The Fed, SEC, et.al. facilitate a restructure & buy out such that the 'system' survives (roll assets into some other bank or broken up & auctioned off).

It doesn't have to be all failure or all bail out... I can tell you for sure if other bank owning equity saw Citi equity holders go up in smoke and those assets 'dispersed'... the equity holders of those other banks would have a 'come to jesus' with their respective BODs come next annual meeting, if not sooner.

It could probably be done without a lot of overall customer disturbance too IF we had the regulator muscle to exercise this option (probably don't in the current environment though - love to hear from MOM & FFDIC on this).

But something like that seems to me to be the way out of the TBTF trap without falling into the MAD trap which is just as or even more dangerous.

Anarchus asked: "...so my question would be, if independent investors aren't comfortable buying the CP of the SIV's on a freestanding basis, what SUGAR is going to be added to the toxic brew to sweeten this deal?"

I have a theory: A promise of another Fed rate-cut.

Although this is an oversimplification, imagine we were talking about a straight bond. Say the SIV Bond being sold pays 5% at par, based on a 4.75% Fed funds rate. If just after the bond is sold the Fed funds are lowered to 4.25%, however, the value of the SIV bond goes up (all other things being equal).

Also, the 13-week Treasury Index is still lower than the Fed funds rate. When this has happened before the result has been easing of the Fed funds rate until the gap gets closer.

Just a thought, FWIW.

Sebastia

dryfly - I'm in the middle of making home made chicken pot pie (Barefoot Contessa's recipe) so I'll defer to MaxMom for now. I will say if Citi were in Europe it would already have been assisted. Europe bankers are more honest for the most part.

idoc - wrote about Wall Street being secretive. That reminds me of my two difficult decades at FDIC where we regularly received written and in later years email admonitions about not talking to the press or anybody else. Banking regulators give Wall Street bankers the same strict admonitions. We were told to direct inquiries to the FDIC's Office of the Ombudsman where you will receive little more than what is in the official press release. Even Senators are turned away empty handed often with regulatory glee.

dryfly - I'm in the middle of making home made chicken pot pie (Barefoot Contessa's recipe) so I'll defer to MaxMom for now. I will say if Citi were in Europe it would already have been assisted. Europe bankers are more honest for the most part. -FFDIC

You two ought to put your head together and 'operationalize' how something like that might work... the operational logistics might be so severe & the resources required by the regulatory bodies so lacking as to not be an option.

But putting the bank company stockholders in first loss position and making this perfectly clear to everyone would do a lot to correct these abuses. Nothing like letting a Citi fail and allowing JPM or somebody else to gobble up the remains.

Protect the insured depositors, the overall system and to hell with the stockholders & management.

Oh and post the recipe.

dryfly - okay, I'll invite MaxMoma over tonite for chicken pot pie and we will work on something together. Great idea! I cannot wait to see her drive up in her Maroon Mercury Grand Marquis GS. Here is the Barefoot Contessa's receipe. This is my first try at it.

Chicken Pot Pie Recipe : Ina Garten : Food Network

The Seeking Alpha piece on Citi says what we already know; that they're frontloading the pain so they can have a good 4Q. The problem is, these SIVs are now, the MLEC is trying to telescope out the pain, so there should be sustained weakness.

On top of that, the LBO debt issuance has been marked to market @ 96, what happens if they don't get sold at that price? TXU should sell above it, but there's a lot of other turds floating in the LBO punch bowl.

Ain't gonna happen. FDIC does NOT want bank runs and if it were to allow a monster size bank to fail there would no doubt be portions of the public (and government)in great panic.

FFDIC - is there anyway they could do it without a bank run per se... make clear to the public the insured bank deposits will be made whole while making sure stockholder equity feel the heat? Operationally possible that is.

That is my question. I realize the key to the TBTF Strategy is to make sure depositors are held as hostages (human shields so to speak) for management & equity. If equity goes down so does everyone else... That's the MAD part I was referring to.

Is there any way to split the two apart so as to save the insured depositors without offering protection to bank shareholders? We will continue to have serious moral hazard conflicts until we do that... or will require near draconian regulation to limit the resulting moral hazard exposure from not decoupling stockholders from depositors... one or the other.

dryfly - In the mid to late 80s the regulators tried a massive new assistance transaction with First City National Bank - Houston (my employer prior to FDIC)and the second largest Houston bank at that time. First City eventually failed twice so to speak in a series of complicated transactions never before tried and ultimately failed. I retained my bank stock and recieved litigation updates for years afterwards. Former Texas Gov. John Conally was a bank director at the time and had all the pull in the world. It was innovative for its time but did not save the bank in the end. However, the bank holding company shell did survive I think to this day and is still active.

It was innovative for its time but did not save the bank in the end. However, the bank holding company shell did survive I think to this day and is still active.

So in effect they shot the depositor hostages being used as human shields and the stockholders got away and are sill on the lam mocking all. Nice.