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Tuesday, October 16, 2007

 

the super-siv


the markets are taking a negative reaction to the newly-concocted and (imo) shabbily-presented ad hoc plan to liquify the abcp market. a terrific amount of skepticism is coming in from many quarters, including yves smith, mish shedlock, kevin depew, institutional risk analytics and nouriel roubini. in short, the effort appears to do little to resolve the root problems -- and the increasing awareness that a bank such as citi may be in enough trouble to require this sort of shennanigan is unsettling.

The subsidiary banks of C, for example, have about $112 billion in Tier One Risk Based Capital supporting 10x that in "on balance sheet" assets, assets which typically throw off 3x the charge offs of C's large bank peers. A modest haircut of C's total conduit exposure of $400 billion could leave that capital decimated, forcing C into the hands of the New York Fed and FDIC. Of note, looks like the ratio of Economic Capital to Tier One RBC for C at 3.75:1 calculated by the IRA Bank Monitor was not so severe as some Citibankers previously have suggested.

The fact that much of the debt issued by C-controlled SIV's was maturing in November seems to have prompted the Treasury to act, yet another example of "limited government" under President George W. Bush. Apparently there are some people at the Treasury who think that aggregating large bank conduit risk into a single subprime burrito will somehow draw foreign and domestic investors back to the structured asset trough. This notion would be laughable were the situation not so perilous.


it seems to me that the program cannot really amount to a bailout -- it isn't large enough, and it apparently won't accept either the subprime rmbs or the cdo's that are the core of the solvency problem -- and i'm hardly alone in that view.

but the plan may instead be a vehicle for extracting the most solvent assets of existing siv's and keeping them both off the balance sheet and from being marked to market (that is, heavily marked down). to some extent, it seems an admission that many of the impaired assets in conduits and siv's will have to be brought on balance sheet and written down against capital. perhaps the calculus for citi and others is that such writedowns are sustainable -- but what is not is having to write down the higher-grade assets as well, and so they will draw their line in the sand there and hope to hold it.

but it remains to be seen if this new super-siv gets funded by normal cp issuance in spite of the risk that purchasers are overpaying for the supposedly-better assets that back the super-siv.

moreover, timing is a problem -- citi is set to see its reckoning in mid-november, as its siv's come around for refinancing, and the super-siv probably won't be in place to help by then.

and of course the whole program -- which is being met coldly in many quarters -- may yet be retracted or significantly scaled down.

if it comes off, though, it might buy time on the bulk of the losses that large banks are facing in the abcp debacle, with the probable intention of deferring and prolonging the agony until after the 2008 election.

that, however, is subject to the developing consumer slowdown and commerical-real-estate collapse that would likely, in combination with the credit crunch and housing depression, send the broader economy into recession in 2008 if not sooner.

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