SIV Bailout Plan Having Trouble Enlisting Supporters

An article in the Financial Times reports that a meeting to get more financial institutions to join the proposed SIV rescue plan, called the Master Liquidity Enhancement Conduit, or MLEC, didn’t go very well.

Two revelations are surprising. First is that, despite indications in the Wall Street Journal that a few firms, including Wachovia, Fidelity Investments, and Federated Investors, had expressed interest, only Wachovia has joined.

Second, the sponsors failed to describe how the vehicle would work, and particularly, how fees would be shared. How can you ask financial players to sign up to a new venture without an outline of key terms? This seems half-baked.

In addition, many of the participants see the main beneficiary as Citi, which doesn’t bode well for the success of the program. And it probably didn’t help that Rhinebridge, a $2 billion SIV managed by German bank IKB, had breached certain covenants and was likely to be required to sell assets to repay creditors. This follows Cheyne Financial, a $6.6 billion SIV, being declared insolvent yesterday.

The prospective participants may worry that it won’t be easy to find bagholders for this fund….

From the Financial Times:

The backers of the proposed superfund being set up to buy assets from cash-strapped structured investment vehicles met on Thursday night to agree a syndication process to sign up other banks amid widespread scepticism about the plan.

So far only Wachovia has joined Citigroup, Bank of America and JPMorgan Chase, which unveiled the MLEC on Monday.

European lenders and Wall Street investment banks appear more cautious, although some executives at Merrill Lynch and Lehman Brothers have expressed interest in joining.

Some banks question whether the plan will be effective and are concerned about its complexity and lack of detail on fees they would receive.

“We are still trying to figure out the upside for us given that the main beneficiary appears to be Citi,” said an official at one leading bank. Citigroup, which worked with the US Treasury on the plan, manages SIVs with $80bn of assets.

One person close to the plan maintained that there had been “more expressions of interest than you would imagine”.

But the caution was reflected at an SIV conference in London on Thursday where a poll of attendees showed almost half saying the MLEC would not help support SIVs and the asset-backed commercial paper market.

Some SIVs are struggling to refinance their commercial paper because investors are concerned about their exposure to US subprime mortgages. The US Treasury argues the superfund will help prevent these SIVs being forced into fire-sales of assets, letting them sell assets to the superfund at “market” prices.

But some see the plan as a way for SIV managers to avoid recognising the scale of their losses.

European banks, including HSBC, Barclays and UBS, have been monitoring developments but have proved reluctant to join.

Several key issues still needed to be resolved, said people familiar with the matter, including the methods that will be used for valuing assets that will be transferred from SIVs to the new fund.

An article in the Economist adds to the litany of doubts:

You know a market has seen better days when some of its leading actors are compared to a deadly virus. With many traditional buyers of commercial paper (short-term corporate debt) still on strike, Wall Streeters with more wit than taste have branded the sickliest of the structured investment vehicles (SIVs) that issue such paper to punt on longer-term assets “SIV-positive.”….

Joseph Mason, a finance professor at Drexel University, sees bigger problems. He argues that voluntary co-guarantee schemes like this are doomed to failure because only the weakest institutions want to participate. Like Groucho Marx, the SIVs that most easily qualify for membership of the club will be the least likely to want to join, since they will have cheaper funding alternatives. He also worries that the fund’s creation suggests “we now have an entire market that’s deemed too big to fail.”

Even those who support the fund admit that it is, at best, a temporary solution, buying time so SIVs can find other sources of finance or wind down gracefully. It may also provide breathing space in which to sort out deeper problems facing the market, such as the unstable structure and opacity of SIVs. “The market has to move to a new business model,” says a senior Treasury official.

And an openly derisive opinion piece, “CP Fund Adds New Pyramid Scheme Layer,” by Mark Gilbert at Bloomberg:

It seems the way to reassure investors that it’s safe to buy the repackaged junk that has torpedoed credit markets in recent months is to repackage the least-junky bits of the junk into more palatable securities. The pyramid just grew another layer….

If this lifeboat is such a wonderful example of modern financial engineering, how come the guys at Goldman Sachs Group Inc. haven’t seen fit to clamber aboard? Or Morgan Stanley? Or Merrill Lynch & Co., Lehman Brothers Holdings Inc. or Bear Stearns Cos.?….

“By insulating the junk from the sellers of junk, the holders of junk should be spared the problems of junk,” Nick Parsons, head of markets strategy at National Australia Bank Ltd.’s NabCapital unit in London, wrote in a report. “The one flaw in this cunning plan, however, would be if investors took fright at being reminded just how much junk is still in the system.”…

I can’t decide whether the Treasury’s willingness to patronize such a misguided effort is evidence that the situation is more desperate than anyone thought, or a positive sign that financial markets will continue to evolve and innovate and might eventually wrestle the subprime demon to the ground.

One thing is clear, though: I wouldn’t want any of my pension money invested in the Master Liquidity Enhancement Conduit.