Proposed Super SIV continues to evolve

Posted Dec 10th 2007 6:02PM by Joseph Lazzaro
Filed under: Citigroup Inc. (C), JPMorgan Chase (JPM), Bank of America (BAC), Housing

The proposed Super SIV may end up being considerably smaller than the original outline, as banks and other SIV-owning institutions either write-down or find other ways to dispose of problematic SIV assets, The New York Times reported Monday.

Conceptualized following a request from the U.S. Treasury, the Super SIV is designed to facilitate the orderly sale of high-risk packaged mortgage loans and assets held by SIVs, but not to rescue those SIVs.

As presently configured, beginning in January/February 2008 the Super SIV will lead a coordinated, gradual purchase-and-resale of these assets, which, officials say, will avoid a "mad rush to the door" of SIV asset sales. The latter would further depress prices, and create another round of credit market turmoil, with negative consequences for the U.S. economy. The Super SIV will raise money from financial institutions to fund itself.

However the Super SIV's size -- coordinators originally expected to raise about $80 billion -- may end up being considerably smaller, particularly if banks and other SIV owners continue to dispose of their assets on their own.
For example, on Monday, Societe Generale SA, France's second-biggest bank, announced it will bail out a $4.3 billion SIV fund, Bloomberg News reported. Societe will take on assets of $387 million, including bonds backed by subprime mortgages, and follows action by U.K.-based HSBC Holdings Plc (NYSE: HBC) and Rabobank Groep NV of the Netherlands to rescue SIVs.

Economic Analysis: Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM) are leading efforts to establish the Super SIV, but it's still unclear who's providing back-up (translation: last resort) financial support for the Super SIV. Until that's known, it's best to hold off regarding a Super SIV evaluation.

Further, while the at-risk SIV asset market appears to be shrinking as banks/institutions initiate their own write-off actions, it would be hasty to conclude that more at-risk SIVs won't appear after the new year. Finally, while the Super SIV does not eliminate SIV losses, just the mere discussion of a Super SIV has helped calm credit markets, a positive development.

Tags: BAC, Bank of America, bond market, bonds, C, Citigroup, credit crunch, credit market, HBC, housing, HSBC Holdings, inthenews, JPM, JPMorgan Chase, mortgages, SIVs, Societe Generale, subprime mortgages, Super SIV, SuperSiv, U.S. Treasury