Saturday, December 22, 2007


"One of the federal government's signature efforts to ease financial instability caused by the subprime-mortgage crisis collapsed as the nation's three biggest banks gave up on a fund intended to bail out tens of billions of dolars in troubled investments. ... Benn Steil, senior fellow at the Council on Foreign Relations, a nonpartisan think tank, said the plan was based on the flawed notion that the fund would pay more for tainted securities than would the banks themselves. 'I'm not surprised that this didn't happen,' he said. 'I never believed the proposal made much sense.' ... One reason for the plan's downfall was that it would only buy the highest-quality assets from the SIVs. That gave banks with SIVs less motivation to create a super-SIV, because the assets they wanted most to unload were those backed by more-troubled slices of mortgage debt", WSJ, 22 December.

"Also good riddance to the entire SIV schemes or scams--$350 billion of them--that are now comatose and dying an undiginified and well deserved death. .. [B]anks decided to ... bring back the junk from off-balance sheet to on-balance sheet. The reason is simple: given massive credit enhancement provided by the banks to the SIV dumping the losses on the investors was not feasible. ... So at the end the banks did the rational and unavoidable thing given that no investors was foolish enough to fork money into this Super-SIV turkey that could not fly in spite of the full support of Treasury and given that letting the roll-off of the ABCP destroy the SIVs and force a fire sale of assets would have triggered even bigger losses than the alternative of parking the assets on the balance sheet of the banks. ... This is the pathetic conclusion to the entire SIVs scam, as these were scams in the first place. The banks went to extreme length to create off balance sheet vehicles to exploit regulatory arbitrage ... and to provide tax avoidance ... to investors. ... So the SIVs were part and parcel of a securitization food chain that produced Frankenstein toxic food to be disposed of and shoved off the banks' tables. Thus, the SIV should have been banned in the first place by regulators; or be subject to the same regulations and supervision ... as the assets on the balance sheet of banks. Instead a bunch of clueless and incompetent regulators ... allowed these monsters to be created in the first place; these are the same folks that allowed the Enron SPV's--a close cousins of the SIVs--to be created and create a cancer that destroyed Enron. ... Will U.S. regulators learn their lesson and ban these off balance sheet scams or force them to have the same regulatory framework of on balance sheet assets and liabilities?", Nouriel Roubini (NR) at, 22 December.

I disagree with the WSJ. MLEC failed because Hank Paulson (HP) and the banks did not find enough "greater fools" to dump the worthless assets on. If the banks intended to put fairly valued assets into MLEC, it could have succeeded. As it is, Helicopter Ben will buy the junk through his TAF. MLEC, RIP. Better luck next time, HP.

Way to go NR! That's banging one out of the park, like the "Mick" did in old Yankee Stadium (YS). A 520-footer, right over the 461 sign in the left-center "bulge". What to do with our financial engineers now? Let's see if Communist China still has reeducation camps to send them to.

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