Big Banks Trying to Avoid Global Economic Crash, Planning to Back as Much as $100 Billion in “Shaky” Mortgage Securities and Other Investments
October 13th, 2007How these banks are going to juggle so much filthy, festering, hemorrhaging debt is a mystery to me. Maybe governments will eventually wind up eating it, like with Northern Rock in the UK. Maybe hyperinflation will make paying these debts down much easier. Maybe… Hmm. How much opium is Afghanistan producing???
This is an astonishing article. These firms are admitting that the thing is about to go off the rails. They need to cling together and absorb the fallout from this subprime thing, or the it’s game over.
Via: Wall Street Journal:
In a far-reaching response to the global credit crisis, Citigroup Inc. and other big banks are discussing a plan to pool together and financially back as much as $100 billion in shaky mortgage securities and other investments.
The banks met three weeks ago in Washington at the Treasury Department, which convened the talks and is playing a central advisory role, people familiar with the situation said. The meeting was hosted by Treasury’s undersecretary for domestic finance, Robert Steel, a former Goldman Sachs Group Inc. official and the top domestic finance adviser to Treasury Secretary Henry Paulson. The Federal Reserve has been kept informed but has left the active role to the Treasury.
The new fund is designed to stave off what Citigroup and others see as a threat to the financial markets world-wide: the danger that dozens of huge bank-affiliated funds will be forced to unload billions of dollars in mortgage-backed securities and other assets, driving down their prices in a fire sale. That could force big write-offs by banks, brokerages and hedge funds that own similar investments and would have to mark them down to the new, lower market prices.
The ultimate fear: If banks need to write down more assets or are forced to take assets onto their books, that could set off a broader credit crunch and hurt the economy. It could make it tough for homeowners and businesses to get loans. Efforts so far by central banks to alleviate the credit crunch that has been roiling markets since the summer haven’t fully calmed investors, leading to the extraordinary move to bring together the banks.
In recent weeks, investors have grown concerned about the size of bank-affiliated funds that have invested huge sums in securities tied to shaky U.S. subprime mortgages and other assets. Citigroup, the world’s biggest bank by market value, has drawn special scrutiny because it is the largest player in this market.
Citigroup has nearly $100 billion in seven affiliated structured investment vehicles, or SIVs. Globally, SIVs had $400 billion in assets as of Aug. 28, according to Moody’s.
Such vehicles are formally independent of the banks that create them. They issue their own short-term debt, usually at relatively low interest rates reflecting their high credit rating. The vehicles use the money to buy higher-yielding longer-term assets such as securities tied to mortgages or receivables from midsize businesses seeking to raise cash.
Many SIVs had trouble rolling over their short-term debt in August because of concerns about the quality of their assets. That contributed to the broader seizing up of credit markets.
The Financial Services Authority, the United Kingdom’s markets regulator, has suggested that U.K. banks consider participating in the plan, a person familiar with the situation said. HSBC Holdings PLC, the largest U.K. bank, has an affiliate SIV called Cullinan Finance Ltd. with $35 billion in senior debt. An HSBC representative wasn’t immediately available to comment.
If the banks agree, the plan could be announced as early as Monday, people familiar with the matter said. Citigroup announces third-quarter earnings Monday. The tentative name for the fund is Master-Liquidity Enhancement Conduit, or M-LEC.
Research Credit: PD
As has been the case WHENEVER big business has “gotten into trouble” in the last 25 years or so, we the tax payers shall bail them out, going farther into debt to do so. They have pretty much perfected the strategy of privatizing the profit/socializing the risk. Fascism at its very best.
From a broader view, the “haves” have been working for quite some time (I’d say it really went into high gear under Reagan) to suck every last penny out of the rest of us, even pennies we won’t have for generations to come. In addition to “oops, we blew it, can you rescue us, mighty Federal Gov’t?” there is “Osama will get you unless you blindly support our ludicrous misadventures, which will cost outrageous sums of money — and blood — to implement,” and “we need to subsidize various big businesses to the tune of billions of $s in order to stay competitive”, among others schemes that would make an old-time snake oil salesman blush.
I’d love to see someone put together a graph tracking 3 items: 1) government spending and its implicit taxpayer indebtedness, 2) corporate profits, and 3) SSRI consumption in the US. Gee, what might it look like? 99% correlation between any 2? At least that high, I’d guess, over the last 6.5 years anyway.
So much information, so little perspective.