New York Times op-editorialist Paul Krugman got one right today. And its Floyd Norris points out why the solution to the problem Krugman highlights could be SWFs (Sovereign Wealth Funds). Krugman does not know how much the financial industry's problems will cost and Norris suggests that SWFs -- government investment funds -- are worth between $2 trillion and $15 trillion.

Krugman's right that the Fed's four attempts to reboot the financial system have not worked because they dance around the most fundamental problem -- nobody knows the depth of the financial hole. If I was in charge, I would find out where all the toxic waste is buried and estimate the amount of capital needed to offset the cost of writing it down. In my view, it makes sense to mark the toxic waste to market and to raise capital at the same time.

Norris points out that SWFs could be part of the capital raising solution -- as they have been in the cases of Citigroup Inc. (NYSE: C) and UBS AG (NYSE: UBS). He also suggests two pitfalls of SWFs as a source of capital. First, they are government controlled which could allow the SWFs to use the resulting power over our financial institutions to further their political ends. Second, whenever a new acronym such as SWF emerges in the financial world -- and there have been plenty including Collateralized Debt Obligation (CDO) and Structured Investment Vehicle (SIV) -- Wall Street will find a way to profit from it in the short-term while sticking the long-term costs on someone else.

Continue reading Krugman gets one right and why SWF does not mean Single White Female

Krugman gets one right and why SWF does not mean Single White Female originally appeared on BloggingStocks on Fri, 14 Dec 2007 10:00:00 EST. Please see our terms for use of feeds.

Continue reading Proposed Super SIV continues to evolve

Proposed Super SIV continues to evolve originally appeared on BloggingStocks on Mon, 10 Dec 2007 18:02:00 EST. Please see our terms for use of feeds.

Bloomberg News reports that HSBC Holdings Plc (NYSE: HBC), Europe's largest bank, has decided to rescue its own $45 billion worth of Structured Investment Vehicles (SIVs). HSBC's plan lowers the odds that Hank Paulson's Super SIV plan to rescue the $320 billion SIV industry -- whose values Fitch reports have declined to 70% of their stated worth -- will succeed. The implications for Citigroup Inc.'s (NYSE: C) $80 billion worth of SIVs are also potentially scary.

Specifically, HSBC will sell bonds to finance the purchase of two SIVs -- Cullinan Finance Ltd. and Asscher Finance Ltd -- taking on their $45 billion worth of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). By August 2008, HSBC expects to provide the new company that buys the SIVs' assets with $35 billion worth of funding and loan facilities, thus removing the risk of a forced sale of the SIVs' assets because of declines in the net asset values. HSBC says, however, that investors will still bear the losses stemming from defaults in the underlying assets.

It seems to me that HSBC's move could have an impact on the Super SIV intended to bail out Citigroup. By encouraging the prompt sale of the SIVs, CDOs and MBSs, HSBC could provide a model that others may follow. If successful, HSBC's approach could supersede the Super SIV plan. I'd prefer to see the banks bail themselves out, rather than relying on the government.

Continue reading HSBC not waiting for Paulson's Super SIV

HSBC not waiting for Paulson's Super SIV originally appeared on BloggingStocks on Mon, 26 Nov 2007 10:00:00 EST. Please see our terms for use of feeds.

I've been talking about the Super SIV bailout plan since the plans for the fund first became public October 14. Today The Wall Street Journal is questioning whether the Super SIV bailout fund can be funded in time [subscription required] to help struggling SIVs who need to find investors for $100 billion in debt coming due in the next six to nine months. The Journal reports some of the biggest SIV operators already are selling their assets, including Citigroup (NYSE: C), the Super SIV champion and the operator of the largest chunk of SIVs, and Rabobank of the Netherlands. Moody's Investor services continues to downgrade the types of assets held by the SIVs, especially assets based on subprime mortgages in the U.S.

Why should you care? You may be holding a money market fund or mutual fund that holds debt from these SIVs in trouble. If the bailout doesn't arrive in time, SIVs will have to restructure their debt, wind down, or in the worst-case scenario become unable to pay their debt investors. When the Journal first started talking about this mess, it reported SIVs held $400 billion in assets globally. Today, because of the write-downs and sale of assets, the Journal is estimating the total value of SIV assets at $350 billion.

Continue reading Will the SIV bailout arrive in time?

Will the SIV bailout arrive in time? originally appeared on BloggingStocks on Wed, 24 Oct 2007 16:25:00 EST. Please see our terms for use of feeds.