Top U.S. banks abandon plan for Super-SIV

By SiliconIndia   |   Wednesday, 26 December 2007, 04:40 Hrs
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New York: The top three U.S. banks said that they have given up a government-supported plan for a fund to bail out structured investment vehicles after Citigroup and others launched independent rescues, making the fund unnecessary.

The retreat by Citi, Bank of America and JPMorgan Chase from the potentially $80 billion Super-SIV 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 a positive in tense money markets, where rates have been high enough to trigger central banks globally to conduct auctions to thaw the market.

"It is 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 banks said in a statement that they had determined how the Super-SIV, known as Master Liquidity Enhancement Conduit (M-LEC), would work and that the fund was ready to be launched if market participants had demanded it.

But, the banks added that feedback from possible financiers and users of the fund indicated it was no longer necessary because SIVs were selling assets on their own, finding other ways to raise money or otherwise restructuring. The rescue fund was announced in mid-October as many SIVs were struggling to refinance short- and medium-term debt to fund longerterm assets including 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 discussions about 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 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 and Rabobank. Citi, JPMorgan and Bank of America said M-LEC may be revived if there is demand. The news was positive for money markets, where three month dollar deposit rates fell to 4.68 percent from about 4.76 percent.

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