Tuesday, November 27, 2007

MLEC Update

"In another sign of progress, BlackRock Inc. is expected next week to be named the manager for the $75 billion to $100 billion fund, people familiar with the matter said. Blackrock will be considered a neutral party and will help set pricing for the assets. As of now, it doesn't appear BlackRock would invest in the fund", WSJ, 23 November.

"A $41 billion question mark is hanging over Citigroup Inc. That is the amount, in a worst-case scenario, of potentially shaky securities the bank would need to bring onto its balance sheet. ... The fate of the $41 billion rests on the outcome of a debate going on in accounting circles over what constitutes a 'reconsideration event'. ... Like other banks, Citigroup structured these vehicles so they wouldn't be included on its books. The vehicles are created as corporate zombies that ostensibly aren't owned or controlled by anyone. In that case, accounting rules say consolidation of such vehicles is determined by who holds the majority of risks and rewards connected to them. ... Citigroup believes that because it hasn't changed the documents or contracts related to the vehicles, it shouldn't have to reconsider its relationship to them", WSJ, 26 November.

"In a sign of the building pressure, United Kingdom banking giant HSBC Holdings PLC yesterday became the first bank to bail out specialized funds known as structured investment vehicles. HSBC plans to gradually shut down two bank-sponsored SIVs and take $45 billion in mortgage-backed securities and other assets owned by the funds onto its own balance sheet. ... Banks technically aren't required to rescue their SIVs, but they may risk harm to their reputation if they don't. ... HSBC's plan to rescue the two SIVs is complex. The company plans to set up at least one structure that, much like the planned super fund, will issue commerical paper or use HSBC's own funding to buy assets from the SIVs", WSJ, 27 November.

Countrywide borrowed $51.1 billion from Atlanta's Federal Home Loan Bank. Charles Schumer, NY Senator, wants regulators to consider the risks this poses, WSJ, 27 November.

Citigroup's sponsored SIV accounting is nonsense and always was. If Citigroup does not control the SIVs, may I take control of them and manage them for say 50 basis points a year? That's $205 million a year. I'll take it. I work cheap, I'll take 25 basis points. In accounting, substance rules form. Citigroup created a blizzard of paper to obscure the SIVs economic realities. I say: Citigroup and KPMG fess up. Cut the nonsense.

Who considers BlackRock a neutral party? Henry Paulson? That BlackRock will not invest in the fund speaks volumes.

Why HSBC's complexity? Will HSBC buy the SIVs assets, or won't it? That HSBC thought it best to recognize the SIVs on its own balance sheet portends ill for Citigroup.

Countrywide's borrowing shows the situation is dire. I suspect the powers that be must sacrifice Countrywide for the greater good, showing "market discipline" while protecting Citigroup. Hank Paulson regrets that even one large financial institution that must lose its life for the good of the country. Countrywide will be "crucified on the free market cross for Citigroup", paraphrasing William Jennings Bryan.

No comments: