Monday, October 15, 2007

Banks to Fund Bailout of...Themselves

Maybe I'm just a simple country boy, but this seems like the dumbest idea I've seen since....well I'm not sure when, but certainly a long time:

NEW YORK (AP) -- The nation's three largest banks said Monday they will team up to buy tens of billions of dollars in investments that lost value after global credit markets seized up.
The plan is designed to inject more confidence into the market, and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs, locked up this summer.

The major banks all have off balance sheet investment vehicles called SIVs which issue commercial paper and use the proceeds to buy lower rated, higher yielding securities like low rated mortgage securities. Why are they off balance sheet? The easy answer is that they don't want this toxic crap on their balance sheet, but how they get away with it is not something I've spent a lot of time pondering. Anyway, the banks are now putting together a bigger version of an SIV to buy the crap that the old SIVs can't get funding for anymore. The obvious goal is to keep this stuff off the balance sheet because if they have to claim it, the balance sheet might actually be a true reflection of their current financial condition and of course we can't have that.

In another twist, the new super massive SIV will only buy the highest rated of the crap in the current SIVs:

By buying SIVs' distressed investments, the new fund would inject enough liquidity into the market to make investors more confident in buying commercial paper.

The funds' backers said they will shy away from risky instruments and buy only highly rated, asset-backed debt -- a market that is already beginning to show signs of life.

I'm not sure how this will help the current SIVs when they will be left with only the crappiest of the crap, but then logic has never been the strong suit at places like Citigroup. The goal seems to be to appear to be doing something rather than actually accomplishing anything and this vehicle seems perfectly designed to accomplish just that.

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