Citigroup (NYSE: C), the Bank of America (NYSE: BAC). and JPMorgan Chase (NYSE: JPM), the three largest U.S. banks, have reached an agreement on the structure of an $80 billion fund to help revive the market for short-term debt, a person familiar with the talks said, Bloomberg News reported.
The banks want to establish the fund, called the "Super SIV" or master liquidity enhancement conduit ("M-LEC"), as a way to obtain short-term credit to finance high risk / high-yield investments in subprime mortgage loans. The fund would buy some of the $320 billion in assets held in structured investment vehicles, or SIVs. SIVs typically borrowed money to invest in longer-term investments, like subprime mortgages.
Subprime debt at the core
However, investors fled subprime mortgage investments and assets backed by subprime mortgages after subprime mortgage defaults rose substantially this year: those defaults were a major factor in the August 2007 liquidity crunch and equity market sell-off. The defaults, and concern about possible future subprime defaults, have driven investors from all but the safest debt forms. Deutsche Bank AG analysts Tuesday said that losses related to subprime mortgages may reach $400 billion globally, Agence France-Presse reported.
The banks hope to have the Super SIV in place by the end of 2007, but the plan is drawing criticism from investment circles. Josh Rosner, managing director of Graham, Fisher & Co, said the Super SIV is flawed, according to a report from Bloomberg News.
"The whole thing is flawed,'' said Rosner, whose New York-based firm analyzes structured finance and real estate investments. "As opposed to recognizing losses, we're trying to roll those losses into the future, regardless of the sanity or safety and soundness of doing that.''
Greenspan also expresses concern
Further, about a month ago former U.S. Federal Reserve Chairman Alan Greenspan said the Super SIV fund could have serious repercussions, according to an interview with the Emerging Market newspaper.
In the article, Greenspan said it wasn't clear to him "that the benefits of that kind of fund (Super SIV) outweigh the risks."
Economic Analysis: It's difficult to judge the appropriateness and efficacy of the proposed Super-SIV until full plan details emerge, but the initial outline has raised legitimate questions. Economists and analysts don't know if the plan will fail to mark-to-market the reduced value of various subprime debt and/or roll problematic (or zero-value) debt into new debt. Hence, it's best to await further review by former Fed Chair Greenspan, and by the U.S. Federal Reserve, before forming a conclusion regarding the proposed Super-SIV.
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Reader Comments (Page 1 of 1)
11-16-2007 @ 4:49PM
Jill Schottenstein said...
"Ohio court gives victory to homeowners facing foreclosure"
"Until this ruling, the courts have been letting them get away with it. They've also gotten away with the lax legal standards of proof because most people facing foreclosure don't have the money to fight lenders in court. Judge Christopher Boyko asked Deutsche Bank on Oct. 10 to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But the bank couldn't do that. It could only show that there was an intent to convey the rights in the mortgages rather than proof of ownership. That's because to make things easier for the banks to buy and sell these securities the actual mortgage notes are not shipped around the world."
The report of Independent Registered Public Accounting Firm
"Pricewaterhouse Cooper LLP: Because of its inherent limitations control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. "'
February 21, 2007
"Congress finally takes steps to add protections for home-loan borrowers"
"The bill, if passed by the Senate, would bar a lender from making a loan unless the borrower has a reasonable ability to pay and would set clear federal standards that apply to all lenders. The bill would also prohibit financial incentives to sell mortgages at higher rates than the borrower qualifies for."
"Mortgage brokers and bank loan officers will have to be licensed and will have to register to be involved in mortgage lending"...
CONGRESS STILL NEEDS TO FORCE AN AUDIT TO CLARIFY THE REAL BALANCE. THERE IS NO ACCOUNTING OF ANY BANKS, OR AUDITORS YET!
IS THERE AN ACCOUNTING AT THE SEC LEVEL?
THE IRS HAS NO RECORDS OF CERTAIN SO CALLED TAX RETURNS, WHERE DID THE MONEY GO? WE NEED THE GAO!!