December 14, 2007 / 9:28 PM / 12 years ago

SuperSIV fund is "not derailed" by Citi news-investor

NEW YORK, Dec 14 (Reuters) - A U.S. Treasury-backed plan to rescue troubled investment funds from the subprime mortgage crisis is “not derailed,” despite a pledge by Citigroup (C.N) to bail out its funds, an executive at Federated Investors, who has been involved in the plan, said on Friday.

“There is still a need, not for a quick fix, but for a longer term solution,” said Deborah Cunningham, chief investment officer for taxable money markets at Federated, in Pittsburgh. Federated is one of the nation’s largest investment managers, with about $276 billion in assets under management.

For months, investors and analysts have worried that so-called structured investment vehicles, or SIVs, which are off-balance sheet funds that banks use to buy high-yielding assets, could buckle amid the current credit squeeze, dumping their investments and possibly igniting a chain reaction that would hamper global economic growth.

Citigroup, the largest player in the SIV market, said late on Thursday that it plans to rescue $49 billion of SIV assets by moving them to its balance sheet. For details, see [ID:nL14194968].

The large U.S. bank’s move further reduces the number of overall SIV assets that investors had feared could be dumped. [ID:nN06255422]

Some analysts say Citi’s decision, coupled with a similar move by British bank HSBC Holdings Plc, makes it unlikely that the rescue fund, dubbed the “SuperSIV,” will get off the ground.

Citi itself is spearheading the backup fund, along with Bank of America (BAC.N) and JPMorgan Chase & Co (JPM.N).

But other observers echo Federated’s Cunningham in saying the SuperSIV may still play a role in saving SIVs or even in helping reshape the SIV market for the long term.

“The entire problem may be solved by the time the SuperSIV gets there,” said Peter Crane, who tracks the money market mutual fund industry at Crane Data, in Westboro, Massachusetts. “But there may still be some pieces of the market that remain, so there may still be a function for it.

“It may end up that HSBC and Citi and others pull (the SIV assets) onto their balance sheets temporarily. (These banks) may still work with the SuperSIV,” Crane said. “There’s even a possibility of saving” the SIV market now.

Citi said in a statement announcing its move that it is still supporting the “SuperSIV” plan.

But many analysts have been skeptical of the SuperSIV from the start, saying it is impractical or would make the SIV situation worse.

“I don’t think that this (latest Citi news) really matters. I don’t think (the SuperSIV) will ever show itself,” said Lee Epstein, chief executive officer of Money Market One, an institutional broker-dealer, in San Francisco.

SIVs UNDER PRESSURE

Structured investment vehicles raise cash for their investments by issuing short- and medium-term debt. They have run into trouble in recent months as investors have shunned any debt potentially linked to subprime mortgages.

Citi and HSBC’s moves will allow them to sell their SIV assets in an orderly fashion, or even hold onto them, though the assets would weigh on the banks’ balance sheets.

Federated’s Cunningham says Citi’s decision probably was prompted by pressure from U.S. ratings agencies.

Moody’s Investors Service said late last month that it cut, or may cut, its ratings for over $100 billion of SIV debt. The agency then said on Dec. 5 that its review of affected SIVs would be complete in two weeks.

RELIEF FOR COMMERCIAL PAPER MARKETS?

Citi’s decision to consolidate its SIVs may be good news for money market investors long worried about their investments.

“The Citi move is going to stop a lot of the bleeding,” Crane said. “Money market funds just breathed a huge sigh of relief.”

But the market for U.S. asset-backed commercial paper, which provides short-term financing to U.S. companies and banks, did not react significantly to the news, according to Money Market One’s Epstein.

The interest rate on asset-backed paper maturing in 30 days remained near its closing level on Thursday of around 6.50 percent to 6.65 percent.

“Nothing’s changed,” Epstein said. Before confidence returns, “the investors have to know that there’s no more bad news out there.” (Additional reporting by Tamawa Kadoya in New York; Editing by Jan Paschal )

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