Run On the Fund

Bloomberg- Florida School Fund Rocked by $8 Billion Pullout

Florida local governments and school districts pulled $8 billion out of a
state-run investment pool, or 30 percent of its assets, after learning that the
money-market fund contained more than $700 million of defaulted debt.

The State Board of Administration manages about $42 billion of short-term
investments, including the pool, as well as the state's $137 billion pension
fund. Almost 6 percent, or $2.4 billion, of its short-term investments consist
of asset-backed commercial paper that has defaulted. Those holdings include $425
million in Axon Financial, a structured investment vehicle, or SIV, according to
state records.

Should the withdrawals continue, Florida's pool may have to consider filing
for bankruptcy protection, says John Coffee, a securities law professor at
Columbia Law School in New York. ``A bankruptcy could handle these kinds of
problems if they feel they'll become insolvent,'' he said.

Coffee predicts the pool will likely file lawsuits to recover losses. ``I'd
expect the pool is going to sue the people who sold them the commercial paper,
saying the risks were hidden,'' he said.

Again- Where do your money market funds invest?

Axon Cut to Default. MBIA Winds Down Hudson Thames

Reueters-

Standard & Poor's on Tuesday said it cut its ratings on Structured Investment Vehicle (SIV) manager Axon to default, after Axon said the deals' assets were insufficient to repay senior liabilities, triggering a liquidation.

The Axon Financial Fund has(had) $12.182B in assets on July 31, 2007.
Where did your money market funds invest?

Also-

Bloomberg-

MBIA Inc., the largest bond insurer, is winding down its structured investment vehicle after failing to find buyers for the SIV's short-term debt since August, Chief Financial Officer Chuck Chaplin said.

MBIA has shrunk its Hudson Thames Capital SIV to about $400 million from $2 billion through asset sales to bondholders, Chaplin said. The Armonk, New York-based company has taken an ``impairment'' on its own $15.8 million equity stake, Chaplin told a conference hosted by Bank of America Corp. in New York today.

'Failing to find buyers since August'? Holy Shit.

To unwind(outwind) the fund, apparently they are using the so called "Vertical Slice" deal which "asks holders of the capital notes to buy a share of the asset backed securities in proportion to the debt they own".

Here's the beauty in this: Instead of getting together and creating a SuperSiv(a vehicle that uses borrowed money to purchase asset backed securities from other Siv's to avoid a firesale), we are effectively creating the MiniSiv (an equity stake guy who ponies up some money, (possibly borrowed) to purchase asset backed securities from a Siv to avoid a firesale).

HSBC Brings It Home

If you've haven't heard already:

HSBC Holdings on Monday said it would move two of its structured investment vehicles onto its balance sheet and provide up to $35 billion in funding, saying it doesn't expect a near-term resolution of the funding problems faced by the vehicles that it and other banks operate.(MarketWatch).

According to Fitch, as of July 31, 2007, HSBC's SIV's were worth almost $42.69 Billion. Is there any equity left?

July 31, 2007 (numbers in Billions):

Cullinan Finance Ltd. $ 35.254Senior Notes $ 2.47B Equity
Asscher Finance Ltd. $ 7.436 Senior Notes $ .52B Equity

Total: $ 42.690 Senior Notes $ 2.95 Equity

(This structure is levered almost 14.471 times).

HSBC brought the SIVs to their balance sheet, effectively guaranteeing the paper, to avoid a liquidity event. Let's assume that the liquidity event would occur when the NAV of the SIV was at 50%. That would be when the equity is worth $1.475 billion, and therefore the value of the underlying assets fell by 3.4%. This is a big drop for AAA assets and if the value drops a cumulative 6.9%, then HSBC will have to take some losses.

However, HSBC implies that all is good-

The banking giant insists earnings won't be materially impacted, because existing investors will continue to bear all economic risk from actual losses. It added that the move won't impact capital requirements much, either.

Remember, 3.4% loss in these assets was a 6-sigma event. Who knows whether a 6.9% drop is plausible.?....

Also- Don't forget the $32 Billion that HSBC sponsors in ABCP Conduits.

Also- Don't forget that Citigroup sponsors $87 Billion in SIVs and $90 more in ABCP Conduits.

Frenchies fail to form SuperSiv?

Reuters-
ZURICH, Nov 22 (Reuters) - French banks tried unsuccessfully to set up a "super-fund" to ease the impact on lenders of the global liquidity crisis, said the Financial Times, citing its French-language publication Les Echos.
An executive close to the discussions said BNP Paribas and SocGen pushed for a fund but mutual banks, led by Credit Agricole (CAGR.PA: Quote, Profile, Research) put the brakes on, said the report. (Reporting by Andrew Hurst; Editing by David Holmes).

Apparently this was in September.

This seems counterintuitive. Wouldn't you just join up with your Yankee buddies? We'll see if the age old adage rings true- If you can't Beat 'em, Join 'em.

Rumor: BlackRock in on SuperSiv

According to Reuters and an unnamed source, BlackRock has been collaborating with the likes of Bank of Amercia, Citigroup, and JPMorgan on the SuperSiv bailout fund. Well, they do have a buttload of moneyfunds of there at BlackRock. It would be a pain if they broke the buck.

Freddie Needs Money

Freddie Mac Posts $2.0 Billion Loss-
Key points-

Freddie Mac's regulatory core capital was estimated at $34.6 billion at September 30, 2007, which represented an estimated $8.5 billion in excess of the regulatory minimum capital requirement, and an estimated $0.6 billion in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight (OFHEO).

-During the third quarter, Freddie Mac reduced the balance of its cash and short-term investments portfolio by $30 billion, which helped the company manage its capital and invest in mortgage-related securities with wider OAS (option adjusted spread). Capital constraints during the quarter limited Freddie Mac's ability to take advantage of purchase opportunities for the retained portfolio and in September the company sold approximately $20 billion in UPB (unpaid principle balance) of retained portfolio assets to manage to the 30 percent mandatory target capital surplus.

-As in September, retained portfolio sales in October 2007 of approximately $25 billion largely reflected activities to manage to the 30 percent mandatory target capital surplus. During the remainder of 2007, the UPB (unpaid principle balance) of the retained portfolio may decline given the impact of the continued earnings volatility created by the current market environment and the need to manage to the 30 percent mandatory target capital surplus.

-so, It looks like Freddie spent most of the quarter juggling arount their retained assets portfolio in order to maintain the Target Capital Surplus as directed by OFHEO.
-What actions would OFHEO take if they went below 'Target Capital Surplus'? Beats me. But this weekend I will read this report:
2006 OFHEO Performance and Accountability Report

Also from Press Release-

-As a result of GAAP losses and in order to manage to the 30 percent mandatory target capital surplus and respond to regulatory concerns, as well as to have the flexibility to effectively manage its business, the company is planning on taking several actions. First, the company has engaged Goldman Sachs and Lehman Brothers as financial advisors to help it consider very near term capital raising alternatives. Second, the company is seriously considering reducing its fourth quarter common stock dividend by 50 percent. If these measures are not sufficient to help the company manage to the 30 percent mandatory target capital surplus, then the company may consider additional measures in the future such as limiting growth or reducing the size of our retained portfolio, slowing purchases into our credit guarantee portfolio, issuing additional preferred or convertible preferred stock and issuing common stock. When market conditions improve and Freddie Mac returns to sustainable profitability, the company will consider increasing the common stock dividend and returning capital to its shareholders through, among other things, calling preferred stock.

If Freddie Mac, the nation's number 2 guarantor of mortgages, decides to limit growth by slowing purchases into their guarantee portfolio, conditions in the mortgage market will get even tighter. Freddie and Fannie are already maxing out on their portfolios.
Nobody is buying subprime and alt-a securitized products, and what if nobody is guaranteeing new conforming loans? More on this later.

Citigroup Downgraded

Bloomberg-Nov. 19 (Bloomberg) -- Citigroup Inc., the largest U.S. bank by assets, was lowered to ``sell'' by a Goldman Sachs Group Inc. analyst who predicted that the lender's writedowns of collateralized debt obligations will total $15 billion over the next two quarters.
''Given the dislocations in the credit markets, we have become more pessimistic,'' New York-based analyst William F. Tanona wrote to investors today, downgrading New York-based Citigroup from ``neutral.'' ``Citigroup will likely face an increasingly challenging operating environment which is likely to pressure results in many of their businesses.''
Citigroup's CDOs account for 25 percent of book value and 50 percent of tangible book value, compared with 20 percent for both those measures at Lehman Brothers Holdings Inc., Bear Stearns, JPMorgan, and Morgan Stanley, Tanona said. The bank's retail banking and credit card business may suffer as consumer-credit conditions worsen, he said.
Citigroup also may be hurt by a continued slowdown in the short-term debt market as investors steer clear of commercial paper issued by structured investment vehicles, Bank of America analyst John McDonald wrote in a note to clients today.
``SIVs face the possibility of selling assets at distressed values thereby exacerbating potential losses,'' wrote McDonald, who rates Citigroup shares as ``neutral.'' Citigroup said this month it provided $7.6 billion of financing to SIVs it runs after they were unable to pay maturing debt.

Fitch may cut Legg's

Fitch Ratings- Fitch Ratings has revised Legg Mason's Outlook to Negative from Stable and has affirmed the following ratings:
Long-term Issuer Default Rating IDR at 'A';--Long-term senior unsecured at 'A'.
The outlook change follows Legg Mason's (LM) announcement of its decision to support certain of its money market funds that have exposure to troubled Structured Investment Vehicles (SIVs). While LM has financial flexibility to provide current levels of support, which thus far equals $178 million of cash collateral, additional funds may be necessary if the market deteriorates further.Fitch's view is that LM management will provide additional support to sponsored money market funds if needed. However, providing such support, under a stressed-case scenario, could exert financial pressures on LM's balance sheet liquidity. The current exposure to non-bank SIVs approximates $5 billion, of which roughly half is to distressed issuers. While any eventual loss would likely be a fraction of this amount, the need to support these losses could negatively affect Legg Mason's overall financial flexibility.

Roughly half is to distressed issuers?

Email from Tradeking

I got this email from Tradeking, a $5.95 broker that does my option trades. I guess the E-trade thing bugged out all the customers.

Dear Investor:
Due to the effect the sub-prime mortgage fallout has had on one of the larger online brokers, some investors have asked us if we're at risk for similar problems. The answer is a resounding "No."
TradeKing does not invest in any mortgage-related securities, including sub-prime mortgages.
If you're concerned about an account you hold with another broker, perhaps you should consider consolidating your assets with TradeKing. We'll even reimburse any account transfer fees your other broker may slap on you between now and December 31, 2007.

Here is the E-trade link -
'We are concerned that future liquidity could be strained and funding at the bank could weaken,' S&P said.

GE Capital Fund Breaks the Buck!

-(Barron's)-thanks 'Calculated Risk'

A SHORT-TERM INSTITUTIONAL BOND Fund RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.

The GE fund, totaling $5 billion, is an "enhanced" cash fund, meaning it seeks to provide a slightly higher yield than a money-market fund while preserving principal and maintaining an asset value of $1 per share.

The fund has been willing to take more risk than a money-market fund by purchasing floating-rate mortgage and asset securities with high credit ratings. The bulk of the money in the fund comes from GE's pension trust and other GE employee benefit plans.

In a Nov. 8 e-mail to institutional holders of the fund, GE Asset Management cited "extreme conditions in the credit markets" and told investors that "it will soon begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund's yield to zero."

In the e-mail, GE Asset Management said the fund has "sufficient liquidity to redeem all non-GE subscribers at the current net asset value (.96) but there can be no assurance that this will continue to be the case at any point in the future as the difficulties in this market persist." Outside institutional investors therefore face a 4% loss on their holdings. GE said it plans to soon redeem $250 million from the fund and may liquidate additional holdings in the future.

Based on information on GE Asset Management's Website, the enhanced cash fund has about 27% of its assets in home-equity asset-backed securities, 23% in residential mortgage securities and the rest in a mix of securities, including credit-card securities and corporate bonds. This information is as of June 30.

The 4% loss suffered by outside investors is sizable relative to the added returns that the fund generated relative to short-term investments. The one-year return on the fund through June 30 was 5.49%, versus one-month Libor of 5.39%.

In response to the Barron's inquiry, GE Asset Management said in an e-mail statement that it has "ceased taking new investments" in the fund "based on our belief that recent extreme conditions in the credit markets, including liquidity concerns and value dislocations, will continue in the foreseeable future."

-Why wouldn't GE support the fund and give everyone a full dollar?
-It's only about $200 million.
-Is it a 'moral hazard' to support such a loss? Bank of America and Legg Mason shored up their funds. BAC is rumored to have to put up $500 million and Legg Mason put up $100 million and arranged another $200 million to prop up their money funds.
-It's only a 'moral hazard' if there are more problem funds that will need to be bailed out.
-However, the bulk of the money in the fund comes from GE's pension trust and other GE employee benefit plans.
-Fuck the employees, right. Those pesky pension liabilities. Did FAS 158 go into effect yet?
-I wonder how this will go over in the media.

Bank of Amercia writes down $3 Billion

Maybe we should change the name of this blog to 'SIV Watch' or something like that.

From the Times-

Bank of America has become the latest institution to take a massive hit from plunging mortgage bond valuations with the announcement that it will take a $3 billion (£1.45 billion) writedown on its portfolio of home loan-backed securities this quarter.
The second-biggest bank in the United States also said that it was injecting $600 million into a structured investment vehicle (SIV), an affiliated entity with a large exposure to high-risk sub-prime mortgages.

Come to the balance sheet baby!

The funds that BAC is sponsoring are named Columbia Management funds.

No Business Purpose

Nov. 13 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said structured investment vehicles, whose assets have dwindled by at least $75 billion since July, will ``go the way of the dinosaur.''

``SIVs don't have a business purpose,'' Dimon told a conference hosted by Merrill Lynch & Co. in New York today.

JPMorgan joined larger rivals Citigroup Inc. and Bank of America Corp. in forming an $80 billion fund to help revive the market for short-term debt. The banks are pushing to have the fund in place by year-end because SIVs have been unable to get credit as subprime mortgage losses drive investors from all but the safest debt.

No Business Purpose? Let us count the ways:
1. To earn Fees
2. To Circumvent capital requirements
3. To Offload paper from the sponsor's balance sheet
4. To Bail Out other SIV's whose NAV has dropped 50%

Did I forget anything?

Citigroup Assures Everything is OK

Nov. 13 (Bloomberg) -- Citigroup Inc. has assured SinoPac Financial Holdings Co., the Taiwan lender with the most holdings in structured investment vehicles, or SIVs, it will support products it sold to the company, a SinoPac executive said.
The pledge was made in a letter Citigroup sent to SinoPac, which has bought 60 percent of its SIV investments from the U.S. bank, said Richard Chang, executive vice president of the Taiwanese lender, in a phone interview today in Taipei.
``The Citigroup letter said its top levels will give the highest attention to our SIV investments and it will try its best effort to support this and provide liquidity,'' Chang said. ``It's a relief to us as Citigroup wouldn't have said so if it feels the situation isn't under control. Overall losses will be limited.''

oh, the situation is under control. ok.

Sinopec owns $210 million of Citigroup backed paper.

Breaking the Buck? or the Bank?

Nov. 13 (Bloomberg) -- Legg Mason Inc. and SunTrust Banks Inc. are propping up money-market funds to cushion them from possible losses on debt issued by structured investment vehicles.
Legg Mason invested $100 million in one of its money funds and arranged $238 million in credit for two others, the Baltimore-based company said in a Nov. 9 regulatory filing. SunTrust Banks Inc. received approval from regulators last month to protect two money funds that bought debt from Cheyne Finance Plc if the SIV is unable to repay the Atlanta-based bank.
``This is the first real case'' of securities held by money-market funds defaulting, said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence Newsletter.

Time for an FDIC insured account?

Super SIV Thoughts

Ok. The three largest banks with exposure to potential SIV liabilities are Citibank, JpMorgan, and Bank of America.
Let's look at their exposure (as of 09/07 according to Fitch) compared to their equity:

C: $90 billion exposure $63.5 billion equity
JPM: $78 billion exposure $67.2 billion equity
BAC: $58 billion exposure $61.1 billion equity

Other notables
State Street STT $28 billion exposure $4.6 billion equity
SunTrust Bank STI $9 billion exposure $9.7 billion equity
Zions Bank ZION $7 billion exposure $2.9 billion equity
see Fitch


You get the point
Any collapse in the assets that back the paper, and these banks must supply 'Credit Enhancement' which means that they must buy the assets. This could ruin the banks. ABX anyone?

Ok. Now, the Treasury department is 'sponsoring' a program to fix the SIV problem. Or should we say 'delay'? The program is headed by Citibank, JPmorgan, and Bank or America. The banks with the most exposure, are therefore creating a fund to rid themselves of exposure. The new SUper Siv fund will buy the assets from struggling Siv's, and then issue commercial paper to fund these purchases.

This is SIVs squared. This is like refinancing a home that has dropped in value, so that I can buy time and wait for it to appreciate back to the price I bought it at. Sound familiar?

A vicious cycle.

This will get interesting.