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Banks Abandon Plan for Super-SIV -- Sources
December 21, 2007 / 8:58 PM / 10 years ago

Banks Abandon Plan for Super-SIV -- Sources

NEW YORK (Reuters) - The three top U.S. banks have abandoned a Treasury-backed plan for a fund to bail out structured investment vehicles, sources familiar with the matter said, after Citigroup (C.N) and others launched independent rescues, making the fund unnecessary.

The retreat from the Super-SIV by Citi, Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) was not surprising to many analysts, who said the fund was a flawed idea and would have been difficult to execute.

But the lack of demand for a super-SIV fund was seen as positive in jittery money markets, where rates have been high enough to trigger central banks globally to conduct auctions to thaw the market.

“It’s akin to not having to use your insurance policy -- the reasons for the fund to be there have gone away, which is good news for the money markets,” said Peter Crane, who tracks the money market mutual fund industry at Crane Data, in Westboro, Massachusetts.

The rescue fund was first announced in mid-October, as many SIVs were struggling to refinance short- and medium term debt they needed to fund their longer-term assets, which include mortgage assets. Many banks and investors had feared SIVs would dump bonds into financial markets, creating a fixed-income glut that could have driven up borrowing costs.

The U.S. Treasury hosted conversations to discuss the fund, but many analysts even at the time questioned whether it would work, since it was not clear why investors who had lost faith in the assets in one structured vehicle would be more comfortable with the same assets placed in a different vehicle.

Since then, the roughly $350 billion of outstanding SIV assets have fallen to under $200 billion, as banks have rescued funds, assets have been sold, and funds have been otherwise restructured.

Citi last week said it was taking $49 billion of SIV assets onto its balance sheet, following similar moves from HSBC Holdings plc (HSBA.L) and Rabobank.

With the SIV market shrinking demand for the SIV rescue fund, officially known as the master liquidity enhancement conduit, or M-LEC, has proven to be low, sources said.


The news was a positive for money markets, where three-month dollar deposit rates USD3MD= fell to 4.68 percent from about 4.76 percent.

The money markets, where banks fund one another and companies and other entities borrow short term, have been in disarray in recent weeks.

Rates have been high relative to where central banks are setting short-term rates, because of concern about how much bad debt may be on the balance sheet of financial companies. Those relatively high rates make borrowing more expensive for companies and consumers, which could weigh on economic growth.

On Dec 12, the U.S. Federal Reserve, the European Central Bank, and the central banks of Canada, England and Switzerland announced plans to auction money-market instruments, to nudge global money markets.

The banks’ retreat from the bail-out fund comes just four days after the banks said they expected the Super-SIV to launch in a few weeks. Money manager BlackRock Inc (BLK.N) had been selected to manage M-LEC.

M-LEC may be revived if there is demand in the future, because much of the structuring work for it has been done, a source familiar with the matter said.

Bank of America, Citigroup and JPMorgan either declined to comment or were not immediately available for comment.

Reporting by Dan Wilchins; Additional reporting by John Parry and Neil Shah; Editing by Gary Hill/Andre Grenon

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