Tuesday, October 16, 2007

What is Citigroup's Problem? or Cuis Custodiet

"All the banks had to do was structure the vehicles [SIVs] so that the risk of loss associated with them was ostensibly transferred to other parties. Then the vehicles could stay off a bank's balance sheet. ... This belies the 'whole legal fiction of separateness' as allowed by accounting rules said Christopher Whalen, managing director of Institutional Analytics. ... No one is saying, of course, that the big banks are literally shams like Enron. ... But banks found they could structure vehicles so that other parties would have to shoulder losses. That allowed them to pass the risks test and keep the vehicles of their books", David Reilly, in the WSJ, 16 October.

If the banks had no risk in sponsoring the SIVs, why are they trying to keep them off their balance sheets today? Who says the banks aren't "shams like Enron"? It appears they used the same type of financing vehicles. The SIV crisis shows what "structured finance" is, i.e., creating vehicles which substance and form differ. Where was the SEC and the Big Four when all this was going on? See my post of 7 October, International Tort Crisis?

A WSJ editorial asks, "So we're left wondering whether Citibank isn't trying , in effect, to pull off the same trick twice? The conduit would issue debt and use the proceeds to buy otherwise illiquid commercial paper. But why would anyone buy the conduit's debt?" Why? To bail out Citigroup.

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