SIV Rescue Plan Reported to be Getting More Support

The story, “Support for SIV superfund grows,” in today’s Financial Times, is curious. Let’s give you the key bits and then go over why it’s odd:

The plan for a $75bn superfund to buy assets from cash-strapped structured investment vehicles appears to be gaining support among sceptical institutions, amid concern that SIVs might start dumping bank debt.

Such forced sales could increase the risk that the credit market turmoil could hurt the broader economy.

Almost half the assets in SIVs are financial institutions’ debt and if the SIVs were forced to make big sales to raise cash, it would tend to drive down prices. This would lift funding costs for banks, which could respond by tightening the supply of credit.

“Yields on bank debt are already high and it could put further downward pressure on the economy. The [superfund] could help prevent that and it is gaining wider support,” said an executive at a Wall Street bank that has not been part of the plan.

Investors are demanding much higher yields on bank debt because of concern over the effect on their balance sheets of the subprime mortgage meltdown…..

Banks, brokers and insurance companies are now paying more to borrow in the bond market than non-financial companies, reversing the historical pattern…..

For the first time, credit default swaps on financial companies are now trading in line with, or even wider than, industrial companies. In other words, it costs more to insure financial debt against default.

Frankly, this is the kind of reporting I associate with the Wall Street Journal, not the Financial Times. The piece doesn’t prove its meager claim that the SIV plan is “getting more support”.

For readers who have followed the SIV rescue plan only casually, recall it was leaked mid-October before a structure or term sheet had been worked out. The three sponsors, Citigroup, JP Morgan, and Bank of America, tried to get some other institutions to sign up, or even say they were likely to participate. However, even though a few said it would be a good idea, and more were skeptical, most left it at a polite, “we are willing to consider it,” which is perfectly understandable, since it would be irresponsible to commit without reviewing the contractual provisions.

The sponsors had said they hoped to distribute a term sheet by the end of last week. That didn’t happen (the sponsors are so eager to show progress that they would almost certainly announce that they had passed that milestone). So propsective participants are where they were a week ago, unable to evaluate the concept.

The FT has in effect based a story on a quote from an unnamed source. And note that he did NOT say that his firm was more likely to join, merely that the plan was “gaining more support.” The only support that counts is the kind that has hard dollars attached, not mere well wishing.

Yes, environmental conditions are increasing pressure on banks so that a plan is likely to be viewed more favorably. But right now, all we have is an SIV rescue plan abstraction. What firms will vote on is a concrete program. And as we have noted before, there are fundamental issues that may not be able to be resolved successfully: timing and the recognition of losses.

On timing, the SIV bailout plan may come together too late. SIVs are already being liquidated, and Moody’s is in the process of reviewing SIVs for possible downgrades. The unwinding of SIVs may be too far advanced for the rescue plan to do much to steady the market.

On losses, investors want the SIV rescue entity’s assets to be valued at market prices. But that is precisely what the selling parities want to avoid. It isn’t clear that this fundamental conflict can be finessed successfully.

It would be better if I were wrong, but I don’t yet see a reason to believe that the SIV salvage operation will succeed.