Is the "SuperSIV" plan still needed?

NEW YORK (Reuters) - A Treasury-backed plan to prevent the dumping of billions of dollars of securities from specialized funds may be less necessary as more banks move to help their funds cope with the U.S. subprime mortgage crisis.

HSBC Holdings Plc, one of the biggest managers of so-called structured investment vehicles, said last week it would move $45 billion of assets from two funds onto its balance sheet. Rabobank followed suit with its Tango fund on Thursday, while regional German lender WestLB may eventually do the same.

Banks like Asia-focused Standard Chartered and Bank of Montreal are also taking steps to avoid an emergency "fire sale" of mortgage-related bonds and other assets from their off-balance sheet SIV funds.

SIVs raise cash by issuing short-term debt and then use the proceeds to buy longer-dated and higher-yielding assets, often tied to U.S. mortgages.

For months, investors and analysts have feared that a fire sale of nearly $370 billion in SIV investments, including $100 billion linked to market leader Citigroup Inc, could end up lowering debt prices, magnifying bank losses and making lenders less willing to part with their cash. Tighter credit could potentially hamper global economic growth.

But that nightmare scenario may be less scary now, with only $200 billion of securities -- or even less -- still dangling over the troubled SIV market.

"The problem is easing a lot. The market is dealing with it," said analyst Bert Ely of Ely & Co. in Alexandria, Virginia. "It eases enormously as SIVs get pulled back on bank balance sheets. My sense is, that's what Citi is eventually going to do."

Ely says that if 33 percent to 50 percent of the SIV assets are put out of reach of a fire sale, "the problem goes away."

That is probably taking some steam out of efforts by Citigroup, Bank of America and JPMorgan Chase & Co to assemble a fund that would support the ailing SIVs, which have struggled to stay afloat as investor interest has dried up on fears of exposure to risky subprime mortgages.

"The market thinks it's a real risk. I personally think that risk is mitigating," said a senior banker at a major Wall Street bank in New York, who spoke on condition of anonymity.

Howard Simons, bond strategist at Bianco Research in Chicago, expresses even more confidence that a fire sale won't disrupt global financial markets.

"I don't fear a fire sale at all," Simons said.

SIVs LET OUT STEAM

SIVs have sold $100 billion of assets in recent months through the end of October, according to Standard & Poor's, leaving them with about $289 billion of assets.

With the recent news from HSBC and other banks, that figure may be closer to $220 billion, based on Reuters calculations. Downsizing of SIVs through opportunistic selling of assets may be continuing.

And several analysts have said they believe that the managers of Sigma Finance, the largest SIV with $53 billion in senior notes outstanding as of November, has likely hoarded enough cash to avoid a fire sale.

This highlights that a large portion of the SIV assets that investors are still worrying about belongs to the seven entities run by Citigroup, which is spearheading the "SuperSIV."

CITI AND THE SUPERSIV

A key reason why European banks have been more inclined to put SIV assets on their balance sheets is that they face less of a financial penalty for doing so, analysts say.

"There's a minimum capital that has to be set aside against (a balance-sheet) asset, regardless of risk" in the United States, the senior banker said, referring to the U.S. "leverage ratio" requirement, which does not exist in Europe.

"And that can be killer, if you're bringing on $65 billion of 'AAA'-rated assets," like Citigroup, he said. Citi's role in the "SuperSIV" plan is "driven a lot by the capital rules here in the U.S. versus overseas," he added.

Citigroup has said publicly it will not take actions that would require it to consolidate its SIVs. But several analysts say that may eventually change, since running the SuperSIV will be expensive, if possible at all.

A Citigroup representative declined to comment.

In any case, the clock is still ticking, with the SIV problem remaining a $200 billion headache for managers scrambling to restructure their funds.

Adding to the gloom, bond rater Moody's Investors Service said in late November that it has cut, or may cut, ratings on over $100 billion of SIV debt. The ratings agency said it will make rating decisions over the next few weeks.

(Additional reporting by Richard Barley in London)

(Editing by Jan Paschal)