I was again with my neighbour talking over the back fence.
‘I had morning coffee with my banker friend,’ said the neighbour, ‘and we again spoke of the debt crisis. He was disappointed that you thought the rescue operation in America to freeze adjustable rate mortgages at the initial teaser rate terms for five years would be little more than a short term stop gap measure.’
‘The critical point,’ I said is that the number of mortgages to be rescued is likely to be too small to make much of a difference. The result is that most of the subprime debt overload will only get larger.
‘The other rescue plan is the US Treasury broking a deal with the three largest banks in America – Citicorp, JP Morgan and Bank of America for them to set up a “super siv” $80 billion fund to bail out ailing sivs. The new fund to be set up is called M-LEC. This stands for Master Liquidity Enhancement Conduit, a tongue twister if ever there was one.
‘Hence the abbreviated name SIVs. This stands for structured investment vehicles, which had been set up by banks as off balance sheet entities to buy higher yielding long term asset backed securities, mainly mortgage securities. The funding came from raisings of short term collaterised (asset backed) commercial paper. The SIV concept was the brainchild of two Citibank executives, and was widely copied by other banks as a smart way to make an arbitrage profit from trading higher yield assets with borrowings of cheap short term debt.
‘Like all good things, the SIV device became overdone, loaded as it was with a mixture of some quality saleable securities, with a lot of more dubious toxic subprimes. On subsequent examination, many of these securities turned out to be worth a lot less than face value.
‘There was about $166 billion in the SIVs. Since then, a number of the major banks including the large international bank HSBC, along with Europe’s largest bank by assets UBS, and France’s second largest bank by assets Societe Generale commenced to take their off balance sheet entities back on their books.
‘This reduces the need for M-LEC being necessary, now that Citicorp has agreed to bring seven of its affiliated SIVs back on its balance sheet at a cost to its dwindling capital of US$49 billion.’
My neighbour was getting a bit tetchy.
‘Why do you constantly harp on negative things? Don’t you ever realise that the glass can be more than half full, rather than the reverse. In your universe, doesn’t anything ever go right?’
‘Look neighbour, I thought you wanted to know what was going on, but if you want a sugar coated lollipop, go elsewhere. You know I’m the debt king. I deal in facts and expectations. I’m not into make believe. If you’re such a scaredy cat, take a nerve pill and lie down. At any rate, I’ll stop now, but you seem a bit too delicate for me to go on.’
‘My apologies, I’m highly strung at the moment, due to financial pressures in my business. If you have the time, perhaps we could meet again tomorrow.’
‘Okay, I’ll see you then.’
