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Friday, December 14, 2007


citi brings its SIVs home

per bloomberg:

Citigroup Inc. will take over seven troubled investment funds and assume $58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets. Moody's Investors Service lowered the bank's credit ratings.

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets, the New York-based company said in a statement late yesterday.

citi worked hard to reduce the obligations by selling off bits to junior shareholders, so this represents what's left. given the failure of the super-SIV, citi had little real choice except accepting forced liquidation. it represents a nominal loss of $9bn -- $49bn in assets less $58bn in debt -- but the assets generally have no bid, and so the real loss is much, much greater.

some are calling it the end of the SIV problem, but i think it's more accurate to say that it's just another step in the deterioration of the banks -- that is, the problem is still there, and the losses are coming; it's just been folded into the bank problem.

the likely result is more capital hoarding by citi and similarly afflicted banks, which means less lending, which means a continuation of a deflationary credit contraction.

next up: the conduits, unleveraged versions of the SIV to which citi and many other banks have explicit credit-backing requirements which have been expanding bank balance sheets for the last few months. conduits are a much larger slice of the credit pie, and so represent another very real threat to the sponsor banks even though the leverage problem isn't nearly so acute.

and that in addition to, for citi particularly, its involvement in at least $25bn in commercial-paper-issuing CDOs stuffed with near-worthless subprime paper.

and then one must consider the inevitable start of writedowns related to RMBS and whole-loan portfolios for banks like citi, and it becomes evident that the troubles are really only beginning for the banks.

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